Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Energy Charter Treaty as a Model Treaty for Energy Trade in South
Asia
University of Eastern Finland
Law School
Master‘s Thesis
30.08.2019
Author: Sikander Zaman Khan (285301)
Supervisor: Moritz Wüstenberg
II
Abstract
University of Eastern Finland
Faculty
Faculty of Social Science and Business Studies
Department
Law School
Author
Sikander Zaman Khan
Title
Energy Charter Treaty as a Model Treaty for Energy Trade in South Asia
Main Subject
Resource Law and Policy
Level
Master’s Thesis
Date
30.08.2019
Number of pages
58
Abstract
Energy Trade within South Asia is lagging behind from trade in other commodities in the region and also in
comparison to regional energy trade in other regions. The thesis analyses the current situation of the energy supply,
generation and consumption in each of the South Asian states that are also the member of the South Asian Association
of Regional Cooperation (SAARC), and it further looks into the future energy trade projects that are being executed in
the region.
The thesis besides analyzing the current energy scenario in South Asia and the regional SAARC laws makes the
Energy Charter Treaty (ECT) as the model on which to frame an energy trade and investment agreement for the region.
The thesis makes the transit, investment and dispute resolution provisions the main scope of the study besides some
other relevant provision. The main provisions are discussed and analyzed in the scope of regional context of
geopolitics, domestic and regional laws relevant to energy and energy trade. The analysis also provides how the certain
provision would be adopted and put in to action and what would their possible effect be.
The thesis concludes that the transit provision is the most important for having a viable energy trade within the region.
The investment provision providing the investors with security of their investment and also the investors has been seen
to be compensated for their investments in other BITs in the region. The two different dispute resolution provisions
provide for an investor to take the state to arbitration for breach of investments provisions and the second provides for
states to resolve dispute between themselves emerging out of treaty interpretations and implementation. Hence the
adoption of the main provision besides other would prove the South Asian region with a better framework for energy
trade and investment.
Keywords
Energy Charter Treaty, Energy Trade, South Asia, SAARC, Investment, Transit, Arbitration
III
CONTENTS
CONTENTS III
REFERENCES V
ABBREVIATIONS XIV
FIGURES XV
1. INTRODUCTION 1
1.1 Problem Statement 1
1.2 Research Questions 2
1.3 Methods 2
2. ENERGY AND ENERGY TRADE 4
2.1 Energy 4
2.2 Energy Trade 6
3. ENERGY TRADE IN SOUTH ASIA 8
3.1 South Asia and SAARC 8
3.2 Energy Profile of South Asian Countries 10
3.3 Regional Energy Trade in South Asia 18
3.4 Interregional Energy Trade Projects 20
3.5 SAARC Laws and Energy Trade 24
4. MODEL TREATY 33
4.1 Definitions and Objectives 34
4.2 Sovereignty over Energy Resources 36
4.3 Transit 38
4.4 Investment 43
4.5 Dispute Settlement between States on Treaty Interpretation 50
4.6 State-owned Enterprises‘ Obligations 51
IV
4.7 Other Relevant Provisions 53
4.8 Summary & Adoption of the ECT provisions in to the Model Treaty 55
5. CONCLUSIONS 56
V
REFERENCES
LITERATURE
Selivanova, Julia- Ehring, Lothar, Energy Transit, p.49-107 in book Julian Selivanova (ed),
Regulation of Energy in International Trade Law: WTO, NAFTA, and Energy Charter.
Kluwer Law International 2012.
Leal-Arcas, Rafael (ed), Commentary on the Energy Charter Treaty. Edward Elgar
Publishing 2018.
Jennings , Robert-Watts, Arthur (eds), Oppenheim‘s International Law, Vol.1. Peace. 9th
edition. Longman 1992. p.382-384.
Keating, Micheal, Is there a Regional evel of Government in Europe p 11 in book
Patrick e Gal s - Christian Lequesne (eds), Regions in Europe: The Paradox of Power.
Routledge 1998.
Konoplyanik, Andrei - Wälde, Thomas, Energy Charter Treaty and its Role in International
Energy. Journal Energy and Natural Resources, Vol.24 No.4 2006, p.523-558
Leal-Arcas, Rafael- Abu Gosh, Ehab S., Energy Trade as a Special Sector in the WTO:
Unique Features, Unprecedented Challenges and Unresolved Issues. Queen Mary
University of London, School of Law Legal Studies Research Paper No. 176/2014.
Wüstenberg, Moritz, An Overview on the Multilateral Regulation of Energy Trade in the
WTO: Framework, Context and Contentions. OGEL Vol. 16 - issue 3 2018.
Pirani, Simon- Stern, Jonathan – Yafimava, Katja , The Russo-Ukrainian gas dispute of
January 2009: a comprehensive assessment. Oxford Institute for Energy Studies (NG 27)
2009.
Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment
and Trade, Kluwer Law International 1996, p.309
Hober, Kaj, The Energy Charter Treaty- An Overview. 8 The Journal of World Investment
and Trade 2007, p.323-356.
VI
Van Hoecke, Mark, Methodology of Comparative Legal Research. Law and Method,
December 2015, p.1-35
OFFICIAL SOURCES
United Nations Documents
General Assembly Resolutions
GA Res. 56/83 of 12 December 2001, Annex: Responsibility of States for Internationally
Wrongful Acts (Yearbook of the International Law Commission, 2001, vol. II (Part Two))
World Trade Organization
WTO Panel Report: India — Certain Measures Relating to Solar Cells and Solar Modules,
WT/DS456/R, WT/DS456/R/Add.1 24 February 2016 (India Solar Cells).
WTO Analytical Index TRIMs Agreement –Article 1 (Jurisprudence), The WTO
Analytical Index: Guide to WTO Law and Practice.
Asian Development Bank
Rahman, Sultan-Wijayatunga, Priyantha -Gunatilake, Herath - Fernando, P. N., Energy
Trade in South Asia Opportunities and Challenges, Asian Development Bank (2012).
Wijayatunga , Priyantha – Fernando, P. N., An Overview of Energy Cooperation in South
Asia. South Asia Working Paper Series, No. 19 2013.
Afghanistan Sector Assessment (Summary): Energy. North–South Power Transmission
Enhancement Project.
World Bank
Potential and Prospects for Regional Energy Trade in the South Asia Region. ESMAP
Reports, Formal Report 334/08 2008, p.29.
Kathuria, Sanjay (ed.), A Glass Half Full: The Promise of Regional Trade in South Asia
VII
South Asia Development Forum. World Bank 2018.
Energy Charter Secretariat
The Energy Charter Treaty: A Reader‘s Guide 2002 p.10.
South Asian Association for Regional Cooperation
SAARC Regional Energy Trade Study (March 2010)
Agarwal, Bharatendu, Harmonizing SAFTA and SARCO‘s Efforts: A Small Step towards
Larger Economic Integration in the SAARC Region. SARCO Newsletter 5th edition 2018,
p.11-15.
Lee, Kevin, Study to Develop a Template for a Dispute Settlement Mechanism between
SAARC Member States regarding the Interpretation and Implementation of the SAARC
Framework Agreement for Energy Cooperation (Electricity). 2017.
CASE LAW
Arbitration Awards
International Centre for Settlement of Investment Disputes
Electrabel S.A. (Belgium) v. Republic of Hungary, ICSID Case No. ARB/07/19,
25.11.2015
Plama Consortium Ltd. (Cyprus) v. Bulgaria, ICSID Case No. ARB/03/24 , 27.08.2008
Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No.
ARB/00/4
Liman Caspian Oil B.V. (the Netherlands) and NCL Dutch Investment B.V. (the
Netherlands) v. Republic of Kazakhstan, ICSID Case No. ARB/07/14, 22.06.2010
Tethyan Copper v. Pakistan 2019 , ICSID Case No. ARB/12/1, 12.07.2019
VIII
Karkey Karadeniz Elektrik Uretim A.S. v. Islamic Republic of Pakistan, ICSID Case No.
ARB/13/1, 22.08.2017
Saipem S.P.A. v. the People‘s Republic of Bangladesh, ICSID Case no. ARB/05/7,
30.06.2009
Arbitration Institute of the SCC
Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia, Case No 118/2001,
16.12.2003
Mohammad Ammar Al-Bahloul (Austria) v. Tajikistan, Case No. V (064/2008),
08.06.2010
Permanent Court of Arbitration
In the matter of the Bay of Bengal maritime boundary arbitration between the People‘s
Republic of Bangladesh and the Republic of India, Case No. 2010-16, 7.07.2014 (Bay of
Bengal maritime boundary dispute)
In the matter of the Indus Waters Kishenganga Arbitration before the Court of Arbitration
constituted in accordance with the Indus Waters Treaty 1960 between the Government of
India and the Government of Pakistan signed on 19 September 1960 between the Islamic
Republic of Pakistan and the Republic of India, Case No. 2011-01, 19.12.2013 (Indus
Waters Kishenganga dispute)
INTERNET SOURCES
International Energy Agency, What is energy security?
[https://www.iea.org/topics/energysecurity/whatisenergysecurity/] (10.05.2019)
Encyclopaedia Britannica, Energy. [https://www.britannica.com/science/energy]
(10.05.2019)
International Energy Agency, Natural Gas Statistics.
[https://www.iea.org/statistics/naturalgas/] (11.05.2019)
Volker Quaschning, Specific Carbon Dioxide Emissions of Various Fuels
[https://www.volker-quaschning.de/datserv/CO2-spez/index_e.php] (11.05.2019)
IX
World Bank, Data for World, South Asia.
[https://data.worldbank.org/?locations=1W-8S] (13.05.2019)
World Bank, GDP per capita growth (annual %).
[https://data.worldbank.org/indicator/NY.GDP.PCAP.KD.ZG?locations=8S] (13.05.2019)
World Trade Organisation, Bhutan.
[https://www.wto.org/english/thewto_e/acc_e/a1_bhoutan_e.htm] (13.05.2019)
Energy Charter Secretariat, Members and Observers to the Energy Charter Conference.
17.10.2018 [https://energycharter.org/who-we-are/members-observers/] (16.05.2019)
SAARC, About SAARC.
[http://saarc-sec.org/about-saarc] (14.05.2019)
SAARC Energy Centre, About us.
[http://www.saarcenergy.org/about-us/] (14.05.2019)
South Asia Regional Initiative for Energy Integration, Country Energy Data.
[https://sari-energy.org/program-activities/cross-border-electricity-trade/country-energy-
data/] (17.05.2019)
SAARC, energy, transport, science and technology.
[http://saarc-sec.org/areas_of_cooperation/area_detail/energy-transport-science-and-
technology/click-for-details_10] (17.05.2019)
Afghanistan Central Statistics Organization, Population.
[http://cso.gov.af/en/page/demography-and-socile-statistics/demograph-statistics/3897111]
(19.05.2019)
Asian Development Bank, Power Interconnection Project to Strengthen Power Trade
between Afghanistan, Turkmenistan, Pakistan.28.2.2018.
[https://www.adb.org/news/power-interconnection-project-strengthen-power-trade-
between-afghanistan-turkmenistan-pakistan] (11.06.2019)
X
Asia Pacific Energy Portal, Bangladesh.9.2017
[https://asiapacificenergy.org/#country-profile/lang/en/geo/BGD] (20.05.2019)
Bangladesh Power Development Board, Present Installed Generation Capacity (MW) as on
28 October, 2018. 28.10.2018.
[http://www.bpdb.gov.bd/bpdb/index.php?option=com_content&view=article&id=5&Item
id=6] (20.05.2019)
World Bank Blogs, How does Bhutan‘s Economy ook 14 9 2017
[https://blogs.worldbank.org/endpovertyinsouthasia/how-does-bhutan-s-economy-look]
(20.05.2019)
International hydropower association, Bhutan. 5.2016.
[https://www.hydropower.org/country-profiles/bhutan 2016] (21.05.2019)
India Ministry of Power, Power Sector at a Glance ALL INDIA. 18.3.2019
.[https://powermin.nic.in/en/content/power-sector-glance-all-india] (21.05.2019)
India Ministry of External Affairs, Agreements signed between India and Bhutan.
[https://www.mea.gov.in/bilateral-documents.htm?dtl/6279/Agreements_signed_]
(22.05.2019)
Nepal Ministry of Energy, Water Resources and Irrigation, Treaty, MOU and Agreements.
[http://www.moewri.gov.np/en/category/treaty_and_agreements] (22.05.2019)
Trading Economics, Nepal GDP Annual Growth Rate.
[https://tradingeconomics.com/nepal/gdp-growth-annual ] (24.05.2019)
Pakistan Bureau of Statistics, Population Census.
[http://www.pbs.gov.pk/content/population-census] (24.05.2019)
World Bank Data Bank, Country Profile: Pakistan.
[https://databank.worldbank.org/data/views/reports/reportwidget.aspx?Report_Name=Cou
ntryProfile&Id=b450fd57&tbar=y&dd=y&inf=n&zm=n] (24.05.2019)
XI
Petroleum Economist, Pakistan gagging for more gas. 24.7.2018
[https://www.petroleum-economist.com/articles/midstream-
downstream/lng/2018/pakistan-gagging-for-more-gas] (1.06.2019)
Asia Pacific Energy Portal, Pakistan.
[https://asiapacificenergy.org/#country-profile/lang/en/geo/PAK] (24.05.2019)
World Bank, World Development Indicators: Growth of output. 2017.
[http://wdi.worldbank.org/table/4.1] (26.05.2019)
World Bank, Projects & Operations , Central Asia South Asia Electricity Transmission
and Trade Project (CASA-1000).
[http://projects.worldbank.org/P145054/?lang=en&tab=overview] (5.07.2019)
CASA-1000, Home.
[https://www.casa-1000.org/] (5.07.2019)
United Press International, Pakistan gas pipeline is Iran's lifeline.19.3.2010.
[https://www.upi.com/Energy-News/2010/03/19/Pakistan-gas-pipeline-is-Irans-
lifeline/27741269029633/] (6.07.2019)
Dawn, IP gas project in limbo: Pakistan wants Iran to interpret sanctions. 02.1.2019.
[https://www.dawn.com/news/1454952] (6.07.2019)
Trend News, President of Turkmenistan: construction of TAPI swiftly underway.
21.5.2019.
[https://en.trend.az/business/energy/3065404.html] (8.07.2019)
Reuters, Tapi gas pipeline to move forward after decades of delays. 13.11.2018.
[https://in.reuters.com/article/emirates-oil-tapi/tapi-gas-pipeline-to-move-forward-after-
decades-of-delays-idINKCN1NI1EB] (8.07.2019)
XII
Inter State Gas Systems, Turkmenistan – Afghanistan – Pakistan – India Gas Pipeline
(TAPI).
[https://isgs.com.pk/projects/tapi/] (8.07.2019)
ToloNews, All You Need To Know About TAPI Project. 23.2.2018.
[http://prod.tolonews.com/afghanistan/all-you-need-know-about-tapi-project] (8.07.2019)
The Economic Times, Pakistan's plan to get electricity from India stalled. 21.10.2015
[https://economictimes.indiatimes.com/news/politics-and-nation/pakistans-plan-to-get-
electricity-from-india-stalled/articleshow/49480065.cms] (10.07.2019)
UN Economic Analysis and Policy Division, LDCs at a Glance.
[https://www.un.org/development/desa/dpad/least-developed-country-category/ldcs-at-a-
glance.html] (15.07.2019)
World Bank Blogs, How South Asia can become a free trade area.14.02.2019
[https://blogs.worldbank.org/endpovertyinsouthasia/how-south-asia-can-become-free-
trade-area] (19.08.2019)
SAARC Arbitration Council
[http://sarco.org.pk/] (23.07.2019)
Energy Charter Secretariat, Transit Protocol. 10.4.2015 [https://energycharter.org/what-
we-do/trade-and-transit/transit-protocol/] (2.08.2019)
OTHER DOCUMENTS
Island Electricity Data Book 2017. Maldives Ministry of Environment and Energy
(Available at: http://www.environment.gov.mv/v2/en/news/6790)
A Year in Review: Annual Report 2017/18. Nepal Electricity Authority
(Available at: https://www.nea.org.np/annual_report)
XIII
Committee for Development Policy, Report on the Twentieth Session (12–16 March
2018), Economic and Social Council. Official Records, 2018. Supplement No. 13.
(Available at: https://undocs.org/en/E/2018/33)
Ariza-Montobbio, Pere. Energy sovereignty: politicising an energy transition. (Available
at: http://www.ejolt.org/wordpress/wp-content/uploads/2015/09/EJOLT-6.79-84.pdf)
Generation Performance in Sri Lanka Report-2016
(Available at: http://www.pucsl.gov.lk/wp-content/uploads/2017/07/GenPerformance-
2016_Draft.pdf)
Investment Arbitration under the Energy Charter Treaty, Ortiz , Alejandro- Lennon,
Michael 2015. Practical Law 2015.
(Available at: http://us.practicallaw.com/1-591-2446)
Presentation: Lex Ferenda in International Law. Presented by Ki-Gab Park. October 23,
2018.
(Available at: http://legal.un.org/avl/pdf/ls/park-kigab_presentation.pdf)
XIV
ABBREVIATIONS
ADB Asian Development Bank
BIT Bilateral Investment Treaty
CP Contracting Party
ECT Energy Charter Treaty
GDP Gross Domestic Product
ICSID International Centre for Settlement of
Investment Disputes
LDC Least Developed Country
LNG Liquefied Natural Gas
MT Model Treaty
MW Megawatt
SAARC South Asian Association for Regional
Cooperation
SAC South Asian Country
SAFTA South Asian Free Trade Area
SARCO SAARC Arbitration Council
SOE State-Owned Enterprises
UN United Nations
UNCITRAL UN Commission on International Trade Law
UNCLOS UN Convention on the Law of the Sea
WTO World Trade Organisation
XV
FIGURES
Figure 1.1 Total energy consumption by source
Figure 1.2 Share of electricity generation by source
Figure 3.1: South Asia region and SAARC members
Figure 3.2 India-Sri Lanka Transmission Link
Figure 3.3: CASA-1000 Transmission Network Map
Figure 3.4: IP and TAPI Natural Gas Pipelines
1
1 INTRODUCTION
1.1 Problem Statement
Energy1 is a vital element for growth and providing consistency to economic
system of nations. It fuels the industry, transportation, lighting and heating in
households and all other sectors, and thus its absence or shortfall results in
pecuniary loss causing impediment to economic growth. To avoid negative
economic and social impacts due to energy shortage, an energy security policy
has to be in place.
Energy security can be defined as ‗the uninterrupted availability of energy
sources at an affordable price‘ 2 security of supply being one of the main
elements of energy security. For a state to ensure security of supply, it has to
diversify its energy sources, energy suppliers and energy routes. Thus, a state
that has an effective international and in specific regional energy trade to secure
its energy demands will be energy secure.
South Asia is almost inhabited by one-third of the world‘s population and home
to upcoming world economic powers like India, hence having great energy
needs for its progress. South Asian region despite bordering energy resource
rich Iran and Central Asian states faces energy shortfall. One way of resolving
these issues of energy shortfall is to way have common energy trade policy and
infrastructure, which would allow to better share energy regionally sourced
from internal and external regions.
‗South Asian countries‘ (SACs)3 at present mostly do energy trade on bilateral
basis, and there is an absence of multilateral framework for regional energy
1 Energy in this thesis discussed for trade purposes, as being in the form of fossil fuels (oil, natural gas and
coal), nuclear energy and electricity. 2IEA, what is energy security?
3 Compromising of Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka.
Also member of SAARC.
2
trade Thus this thesis study‘s the Energy Charter Treaty (ECT) and how it can
be adopted and implemented for growth of regional energy trade in South Asia.
The importance of ECT for South Asian regional energy trade has already been
highlighted by reports from ‗South Asian Association for Regional
Cooperation‘ (SAARC) and ‗Asian Development Bank‘ (ADB) Where they
state that ECT‘s adoption can lead to minimisation of risks associated with
energy related regional investments and trade, as ECT aims to strengthen rule
of law in energy sphere by providing a level playing field of rules to be obeyed
by all the contracting states.4
1.2 Research Questions
In order to resolve the problem identified, the thesis delves on the following
research questions:
i. The present energy profiles, energy trade and regional energy projects in the
SACs.
ii. What is/are the present legal regime/s for energy trade in South Asia and
their efficacy?
iii. Analysis of the main provisions of the ECT in the regional context.
iv. Adoption of a new legal regime (based on ECT and other relevant
international and regional laws) for regional energy trade, and its influence.
1.3 Methods
The employment of ECT provisions to formulate a new energy trading legal regime
for a specific geographic region (in this case South Asia), which has its own set of
legal, economic and political realities requires utilisation of different type of
methods to the answers questions posed in this master‘s thesis
The legal analysis of the ECT in the context of South Asia and framing of a new
regional energy trade regime in this thesis makes the use of de lege ferenda
research method and law in context method.
4 ADB Energy Trade in South Asia 2012, p.94
SAARC, Regional Energy Trade Study 2010. p.126
3
The Latin term de lege ferenda means law that is proposed to be made based on a
present law.5 The method leads to improvement of an existing law, replacing it with
a better one or deriving a new law from it.6 The method has been chosen as present
regional and national laws that are related to trade in South Asia, are lacking in the
sphere of energy resources trade. The choice of the ECT as the basis for lex ferenda
for energy trade in the region is very relevant as it provides for provisions that
directly cater to specific nature of energy resources. Thus in this thesis the relevant
provisions (including transit, investment and dispute settlement) of the ECT along
with relevant regional laws are analysed with the purpose of proposing a new
energy trade regime that meets the specific needs of the region and carry‘s
international standards and principles of international trade and investment law at
its crux.
The second method of law in context focuses on the law‘s current context with a
specific field or area of study, and is a method of comparative research.7 Van
Hoecke states that the law in context method focuses on the ―law‘s current societal
context, including, where appropriate, culture, economy…‖8 In this thesis the
ECT‘s provisions are analysed in the context of regional energy trade within South
Asia, energy profiles of the SACs, regional energy projects, geopolitics, and
domestic and regional laws related to energy and trade. Taking all of the aforesaid
subject areas into context while analysing the ECT provisions would provide for a
blueprint for new regional energy trade regime that is specific to the needs and
requirements of South Asia. The law in context method thus being the appropriate
method alongside de lege ferenda for reaching a conclusion to the research
questions posed in this thesis.
5 Lex Ferenda in International Law, p.7
6 Ibid.
7 Van Hoecke 2015, p.8
8 Ibid., p.29
4
2 ENERGY AND ENERGY TRADE
2.1 Energy
Energy is term in physics that is defined as a property of matter manifested as
capacity to perform work e.g. causing motion or the interaction of molecules.9 And
it may exist in kinetic, thermal, electrical, chemical, nuclear and many other
forms.10
In this thesis energy is discussed in the context of trade and refers to
energy resources such as petroleum, gas, coal and electricity.
Energy consumption has had a steady growth in the last two decades and to meet
the demand so has the energy generation (see Figure 1.1).11
Energy sources are still
dominated by coal, oil, natural gas and electricity with renewable energy sources
having a negligible share in overall consumption. But in recent times with advent of
new technology adoption of renewable energy sources such as wind and solar have
picked up pace.12
Figure 1.1 Total energy consumption by source
9 Oxford English Dictionary definition
10 Encyclopaedia Britannica, Energy
11 Energy consumption: 627, 0990 ktoe in 1990 and 955, 5323 ktoe in 2016 (statistics from IEA,
https://www.iea.org/statistics/) 12
IEA Statistics 2016: -Wind Generation 1990: 3880 GWh, 2016: 957, 694 GWh
-Solar 1990: 87 GWh 2016: 328, 038 GWh
5
Figure 1.2 Share of electricity generation by source
Electricity as an energy source relays on other energy resources for its generation. And its‘
generation is dominated by fossil fuels (coal, natural gas, and oil), which make up almost
two-third of the share of the electricity generation pie (see Figure 1.2). After the fossil
fuels, renewable energy resources (hydropower being the main source among this
category) take the second largest share of the electricity generation pie. And nuclear energy
having almost ten percent share of the pie.
Energy consumption has its own pattern in South Asia, with each state within it relying on
different forms of energy. The choice of energy resources is dictated by their local and
regional availability, delivery and transport, price, environmental effect among other
elements. India and Bangladesh source more than seventy-five per cent of their energy
needs from coal and natural gas respectively. Countries like Pakistan and Sri Lanka rely on
oil, natural gas and hydropower, with each energy resource almost having equal share.
Nepal and Bhutan because of having mainly mountainous terrain and rivers, source almost
all of their energy needs from hydropower. And Maldives being a nation comprising
hundreds of islands and having negligible natural resources has to rely on imported oil for
majority of its energy needs.13
13
IEA Statistics 2016 (Available at https://www.iea.org/statistics/)
6
2.2 Energy Trade
Under the previous heading energy was defined and global and regional share of energy
resources was presented. Fossil fuels lead the way being the main source of global energy
consumption and electricity generation. The aforesaid realities lead to the fact that majority
of the states around the world rely on fossil fuels to meet their energy demands, and in
absence of local energy sources they have to import it (from energy resource rich states).
Thus international energy trade is vital for the functioning of modern economies.
Energy trade and its regulation are affected by the nature of energy that is being traded.
Trade in energy resources like natural gas and electricity can only be made through fixed
infrastructure like pipelines and transmission wires. Trade in oil and coal on the other hand
can be made with less constrains as their transport doesn‘t mandate fixed infrastructure.
Majority international trade in oil is made through oil tankers and on a lesser degree by oil
pipelines. Natural gas until recent times was only economically feasible to be transported
internationally through pipelines, the advent of liquefied natural gas (LNG) changing that.
LNG has been imported by states to diversify their energy mix and hence also ensuring
better energy security.14
Coal being solid in nature is easiest to be transported and handled
among the fossil fuels and also the cheapest, explains it popularity in power generation
despite it being the largest source of carbon dioxide in the atmosphere.15
Energy trade has generally been made bilaterally between states under national and
international trade provisions or multilaterally according to common energy trade policy
and law (e.g. energy trade between US and Canada under the North American Free Trade
Agreement 16
and Energy Community17
). World Trade Organisation (WTO) being a
principle global regulatory framework for trade in goods and services is also of relevance
here, even if it does not directly focus on energy trade. Its obligations of non-
discrimination do apply to energy trade and its dispute settlement system can be employed
to resolve issues related to energy trade.18
14
Global gas trade 1.2 Tcm in 2017, LNG accounting for 32.9% of global gas trade. (IEA Natural Gas
Statistics) 15
Global Energy & CO2 Status Report( https://www.iea.org/geco/emissions/)
16 The United States and Canada are each other‘s largest energy trading partners as measured by the value of
energy commodity trade, which in 2017 stood at US $ 95 billion.
17 Energy Community aims to create an integrated pan-European energy market between the EU and its
neighbours. 18
Wüstenberg 2018, p.16
7
Regional energy trade results in a number of benefits for the states involved in it. It can
balance mismatch between energy demand and natural resource endowments in the region.
Provide better energy security for the states by relying on trade, diversifying forms of
energy and access sources, which might lower the average cost of supply. Enable smaller
states with large energy resources, to develop and export the resources to other markets.
Aid in avoidance, reduction or postponement of expensive capital investment in energy
production facilities and thus free up funds to be invested in other spheres of economy.
Nurture public-private partnership projects and providing more roles to private parties in
the energy sector. Environmental benefits can also be gained by states by substitution of
higher carbon emission projects with lower ones in an interconnected electric power grid.19
19
ADB, Overview of Energy Cooperation in South Asia. 2013, p. 24
8
3 ENERGY TRADE IN SOUTH ASIA
3.1 South Asia and SAARC
3.1.1 South Asia
South Asia- a region ranging from Afghanistan to the Bay of Bengal, Himalayan states of
Bhutan and Nepal and the island nations of Sri Lanka and Maldives- covers 3 percent of
the world‘s land surface and holds 22 percent of the world‘s population The total gross
domestic product (GDP) of the region amounted to US$ 3.34 trillion in 2017, but made up
only for 4 percent of the world‘s total GDP 20
On the other hand, it is one of the fastest
growing regions in the world. It experienced an average annual GDP per capita real growth
rate of 6 percent from year 2000-2017.21
Country such as Bhutan has developed at even
higher per capita GDP growth rates of 6.8 percent. This economic growth is expected to
facilitate the alleviation of widespread poverty in the region.22
The region‘s biggest economies of Bangladesh, India and Pakistan were one country
known as British India up to 1947, which resulted in all of the aforesaid possessing a
common legal base, socio-economics structure and history. The aforesaid states along with
others are emerging economies and thus need constant and a stable supply of energy for
smooth running of their industries. The SACs lay near energy rich Central Asia states23
,
Iran and the Arabian Peninsula. For example, Afghanistan being a landlocked country,
neighbour‘s energy rich Central Asian states, and could the play role of energy transit state
to its eastern neighbours Pakistan and India, and in return could use their sea ports and
communication network for import of fossil fuels. Besides the trade of fossil fuel
commodities, there can also be trade of energy in the form of electricity by connecting the
electricity transmission systems of the SACs, thus if there is surplus energy production in
one region of a country it can be exported to neighbouring country‘s energy deficient
region.
The SACs are all part of the WTO (except Bhutan)24
, and some also have bilateral treaties
for trade between each other, and on regional level are a part of SAARC Within SAARC‘s
ambit they are also signatories to Agreement on South Asian Free Trade Area. In the area
20
WB, Data for World, South Asia 21
WB, GDP per capita growth (Annual %) 22
ADB, Energy Trade in South Asia. 2012, p.1-2 23
Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan 24
World Trade Organisation, Bhutan.
9
of energy trade, SACs signed ‗Framework Agreement for Energy Cooperation
(Electricity)‘ (Framework Agreement). But there is an absence of a concrete multilateral
agreement between the SACs for energy trade, whose void could be filled by the SACs
relying on the ECT for guidance and drafting their own regional energy trade treaty.
Afghanistan is the only contracting state to the ECT, and Bangladesh and Pakistan having
an observer status (in their capacity as signatories to the European Energy Charter and
International Energy Charter respectively), from among the SACs.25
Figure 3.1: South Asia region and SAARC members
3.1.2 SAARC
SAARC was established by the seven South Asian states26
(with Afghanistan joining in
2007) in December 1985, with the signing of the SAARC Charter.27
It was established with
the main aim of increasing economic, social, cultural, technical and scientific progress and
25
Energy Charter Secretariat, Members and Observers to the Energy Charter Conference 26
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka
27 SAARC, About SAARC
SAARC Energy Centre, About us.
10
growth through mutual collaboration and cooperation on international and regional stage to
support common interests. The cooperation aimed to complement the already placed
bilateral and multilateral obligations between them, keeping in mind the respect to each
other‘s national sovereignty and political independence.28
And adhering to principle of
United Nations (UN) Charter to achieve and promote peace, stability, amity and progress
in South Asia.
SAARC‘s endeavour into regional energy cooperation got its beginning through the
establishment of technical committee on energy in 2000 And in 2004 a ‗Working Group‘
on energy was formed aimed with achieving cooperation in the sphere of energy
information exchange, renewable energy and creation of regional power grid. To facilitate
and ease the operation of the Working Group, the SAARC Energy Centre was created in
2005 for achieving the aim of establishment of energy ring in South Asia, by executing
studies and energy trade and cooperation initiatives. In 2009, Working Group on energy
established ‗Expert Groups‘ on oil and gas electricity renewable energy and technology
and knowledge sharing. And in 2014 the SAARC members signed the Framework
Agreement with the objective of increasing regional trade in electricity (discussed in more
detail under section 3.5).29
The incentives of SAARC in regional energy trade have been
also supported by the ADB under the auspices of its Central Asia Regional Economic
Cooperation and South Asia Sub-regional Economic Cooperation programs.30
3.2 Energy Profile of South Asian Countries
3.2.1 Afghanistan
Islamic Republic of Afghanistan is landlocked country with a population of 32
million bordered by Central Asian states of Turkmenistan, Uzbekistan and
Tajikistan to its north, China to its north east, Iran to its west and Pakistan to its
South and East.31
It sources two-thirds of its energy supply needs from imported
oil, with locally sourced natural gas contributing just two percent (having
28
Article I and II of SAARC Charter 29
SAARC, Energy, Transport, Science and Technology
World Bank, Potential and Prospects for Regional Energy Trade in the South Asia Region. 2008, p.29
30 Details about the SASEC and CAREC programs available at
‗https://www sasec asia/index php page=what-is-sasec‘ and ‗https://www carecprogram org/ page_id=31‘
31 Afghanistan Central Statistics Organization, Population.
11
production of approx. 450,000 cubic meters of natural gas per day)32
in the overall
mix.33
It has installed electrical energy capacity of 519MW, importing majority of
its electricity from its neighbouring Central Asians states and Iran, in tune of total
500 MW. 34
The ministries of ‗energy and water' and ‗mines and petroleum‘ are responsible for
the policy making in the energy and electricity sector and oil, gas and other natural
resources respectively. And the electricity generation, transmission and distribution
are managed by one public sector vertically integrated utility company,
‗Afghanistan Electricity Company‘. Afghanistan Gas Enterprise being responsible
for the same aforesaid activates in the natural gas sector.
Afghanistan is working on two international power projects to import electricity
and one project to import natural gas to further export the surplus to Pakistan, thus
in process achieving better levels of energy security and earn much needed foreign
investment. The first project of TUTAP (acronym of the participating states of
Turkmenistan, Uzbekistan, Tajikistan, Afghanistan and Pakistan), aims to provide
electricity and also unify and connect the power grid of Afghanistan which to date
operates as nine separates power islands. The second project of CASA-1000 aims
to supply 1300MW from Kyrgyzstan and Tajikistan to Afghanistan and Pakistan.35
And the third project (TAPI gas pipeline) plans to provide Afghanistan with 500
million cubic meters of natural gas in first ten years of the project. 36
3.2.2 Bangladesh
Bangladesh is bordered by India and Myanmar and has a population of approximately 150
million, making it the eighth most populous country in world. It has the Asia-Pacific
region‘s lowest level of per capita primary energy supply along with the fifth largest
32
This production level is minute considering; Afghanistan‘s proven gas reserves of 15 7 trillion cubic feet
that have yet to be exploited. 33
SAARC Energy Centre: Energy Profile Afghanistan , 2013
34 ADB, Afghanistan Sector Assessment (Summary): Energy
35 ADB, Power Interconnection Project to Strengthen Power Trade between Afghanistan, Turkmenistan,
Pakistan. 2018 36
ToloNews, All You Need To Know About TAPI Project. 2018
12
population. Energy is clearly a primary challenge in the development of the country, which
also has one of the lowest levels of GDP per capita.37
Majority of Bangladesh‘s overall energy supply requirement is sourced from locally
produced natural gas, biofuels and imported oil.38
76 percent of its population has access to
electricity,39
with installed electrical energy generation capacity of 20,430 MW. Fossils
fuels (with natural gas making up about 80 percent of the share) make up 91.8 percent of
the electrical energy mix followed by renewable energy at 1.5 percent and 6.7 percent is
imported energy.40
3.2.3 Bhutan
Kingdom of Bhutan is also landlocked country, nestled in the eastern Himalayas and
sandwiched between its two giant neighbours- China to the North and India to the south
and east of it and having a population of approx. 700,000.41
Bhutan had an average GDP
growth rate of 7.5 percent from the period 2006-2015.42
And power exports from its hydro
resources have been a major contributor to the GDP (11-21 percent from 2003-2013).
Bhutan is gifted with a large potential of hydropower generation sources of up to 23 GW,
of which it only utilises 1.6 GW, 43
but is energy deficient in other energy resources and is
totally reliant on imports from India to meet it needs.
Bhutan exports 4000-5000 MW of electricity to India annually, and thus is the only SAC
which has surplus electricity but has to import it from India in winters/dry season due to
low hydro generation capacity. Bhutan and India electric energy trade provides for
example of efficient and effective use of bilateral agreements. The two have setup several
inter-governmental hydropower projects. The bilateral cooperation agreement signed
37
Asia Pacific Energy Portal, Bangladesh.2017
38 IEA Statistics 2018
39 World Bank Statistics 2016
40 Bangladesh Power Development Board, Present Installed Generation Capacity (MW) as on 28 October,
2018
41 Bhutan 2005 National Census
42 World Bank Blogs How does Bhutan‘s Economy ook
43 International Hydropower Association, Bhutan. 2016
13
between the parties in 2006 planned five hydropower projects that envisioned 10,000 MW
of energy export by 2020. 44
3.2.4 India
Republic of India is the largest country by size and population in South Asia, and the
second largest in the world by population (1.2 billion) after China. It is bordered by
Pakistan to the west, China, Nepal and Bhutan to the North, and Bangladesh and Myanmar
to its east. India economy is the seventh largest in the world by nominal GDP and had an
average growth rate of 7 percent in the last two decades.
India‘s energy demand is primarily met by coal, oil, and gas (gas being equally sourced
from domestic and foreign avenues).45
The aforesaid energy resources also dominate the
(electric) power generation mix at 64 percent followed by renewable energy sources at 34
percent (hydro, biomass, urban and industrial waste power, solar and wind energy) and
nuclear at 2 percent.46
The power generation in 1947 (at time of independence from the United Kingdom) stood at
1.3 GW and as of March 2019 was 350 GW.47
The growth of electricity demand has
outpaced the power supply. Peak demand for 2017-18 was at 164 GW and is estimated to
grow to be around 542 GW by 2031-32.48
India neighbour‘s most of the South Asian countries and thus has energy trade with all of
them on different capacities levels (for example it supply‘s the entire demand of oil and
petroleum products in Bhutan and Nepal). India‘s energy (electricity in specific) trade with
its neighbours is discussed in the following paragraphs.
i. India-Bangladesh
Bangladesh borders India and is also in proximity with Bhutan and Nepal. India exported
660 MW of electricity to Bangladesh before 2018, when 500 MW more was added to the
supply in line with an agreement signed between the two states in 2013.
44
Inter-Governmental Agreement between the Royal Government of Bhutan and the Government of the
Republic of India concerning development of Joint Venture Hydropower Projects through the Public Sector
Undertakings of the two Governments. 22.04.2014 45
IEA Statistics 2018.
About Natural Gas, Indian Ministry of Petroleum and Natural Gas 46
Ibid. As on 18-03-2019 47
India Ministry of Power, Power Sector at a Glance-All India. 2019 48
Ibid. 17th
power survey
14
ii. India-Bhutan
Electricity trade between India and Bhutan started in 1970 and currently there are three
existing cross border interconnections between the two. A 2006 agreement for cooperation
in hydropower aimed to achieve 10,000 MW by 2020.49
And an inter-governmental
agreement was signed between the two states for development of four hydropower power
projects in 2014, totalling generation capacity of 2120 MW.
iii. India-Nepal
Electricity trade between India and Nepal started in 1970s, and a number of treaties
between the two states regarding rivers gave birth to electricity trade. In a most recent
initiative taken from both sides in 2014 was the approval of India-Nepal Agreement on
―Electric Power Trade Cross-Border Transmission Interconnection and Grid
Connectivity‖.50
The aforesaid agreement was signed with aim that it will result in more
electricity flow between the two states, with Nepal importing 500 MW (37 percent of its
energy) from India and exporting surplus energy to India.51
iv. India-Pakistan
As of date, cross-border inter-connections for electricity trade between India and Pakistan
does not exist. Plans were made to export 500MW of electricity in 2014 from India to
Pakistan. However no bilateral agreement between the two states in this regard could be
reached with the advent of new government coming to power in India in later part of 2014
that froze all bilateral talks with the precondition of restarting them only if Pakistan
addressed India‘s concern related to Kashmir separatists 52
v. India-Sri Lanka
There is no cross-border inter-connection between India and island nation of Sri Lanka as
they are divided by the Palk Strait. A grid interconnection of 285 km to export 500 MW
49
Intergovernmental Agreement between the Government Of The Republic Of India And the Royal
Government Of Bhutan concerning Development Of Joint Venture Hydropower Projects Through the Public
Sector Undertakings Of The Two Governments 50
Nepal Ministry of Energy, Water Resources and Irrigation, Treaty, MOU and Agreements. 51
A Year in Review Annual Report 2017/18. Nepal Electricity Authority 52
The Economic Times, Pakistan's plan to get electricity from India stalled.
15
from India to Sri Lanka has been proposed by laying down of submarine cable under the
Indian Ocean but no progress be made on this project.
3.2.5 Maldives
Maldives is an archipelago in the Indian Ocean, comprised of 1,190 sparsely populated
islands, and being the smallest nation by size and population in Asia (having an area of 330
km2 and population of 341,356 as of 2014 census). Due to its geography, Maldives does
not have a national grid, and each populated island is powered by its own power plant that
runs on imported fossil fuel, thus ensuring electricity supply to vast majority of the
population. Electricity generation for the capital, Male accounts for around 60 percent of
the total electricity generation of all the inhabited islands.
Due to its negligible natural resources and geographical distance from mainland South
Asia, Maldives is totally reliant on import of petroleum products for its sustenance and
hence highly affected by fluctuations in international prices. In this cause development of
renewable energy (wind and solar) is needed to meet energy demand and have better
energy security (renewable energy was contributing just 6 MW out of total 220 MW
available capacity by the end of 2016)53
.
3.2.6 Nepal
Nepal is the other Himalayan landlocked country located between China and India having
a population of around 26 million (according to the 2011 census). Nepal has economy
mainly based on agriculture, which employs 70 percent of its populace and has 37 percent
share in the GDP. Nepal had an average GDP growth rate in the last five years of 6
percent. 54
Nepal primary energy resources are biomass, oil, coal and electricity (from hydro).55
Natural gas is non-existent in the energy mix as the country does not produce and it only
imports liquefied petroleum gas for domestic purposes on a smaller scale.56
53
Island Electricity Data Book 2017. Maldives Ministry of Environment and Energy 54
Trading Economics, Nepal GDP Annual Growth Rate 55
IEA Statistics, Nepal 2016 56
SEC Energy Profile Nepal 2013
16
Nepal has current available electricity capacity of 1400 MW of which one-third is sourced
from hydropower.57
And possess the lowest per capita electricity generation in the world.
Nepal predicts peak demand of 5622 MW by 2032 and is hence investing heavily in
hydropower plants and plans to develop 10,000 MW by next 10 years and about 25,000
MW in 25 years. 3820 MW worth of hydropower projects and related transmission systems
are being pursued under the project development agreement between Nepal and India.
These projects aim to meet energy requirements for domestic and export purposes.
3.2.7 Pakistan
Pakistan is second largest country by size and economy in South Asia, after its eastern
neighbour India. Afghanistan and Iran lie to its west and China to its North East. It has
population of about 200 million and possessed GDP in tune of $312.5 billion (as of 2017).
58 59
Almost of half of the country‘s energy supply is made up of domestically produced natural
gas followed by oil and biomass.60
The supply of natural gas to industry, transportation and
power generation sector in the recent decade could not cope with demand and had to be
supplemented by imported LNG starting in 2015.61
Electricity access has been made possible to 99 percent of its population.62
And Pakistan
has available generation capacity of 28,704 MW, fossil fuels making up majority of the
capacity followed by hydropower (which makes up the majority in the renewable energy
mix at 95 percent, followed by biofuel, wind and solar) and nuclear energy.
The country geographical location next to energy rich Iran and Central Asia could provide
it to play a major role in transit of energy to further other states in South Asia.
57
A Year in Review: Annual Report 2017/18. Nepal Electricity Authority 58
Pakistan Bureau of Statistics, Population Census 59
World Bank Data Bank, Country Profile: Pakistan. 60
IEA Statistics 2018 61
Petroleum Economist, Pakistan gagging for more gas. 2018
62 Asia Pacific Energy Portal, Pakistan
17
3.2.8 Sri Lanka
Sri Lanka is an island nation located south east of India in the Indian Ocean. Having a
GDP growth rate of 6 percent from 2000 to 2017, exhibiting strong performance by the
industry and service sector.63
Sri Lanka had total installed energy capacity of 3877 MW in
2017 and peak demand was at 2406 MW, and is predicted to grow to be estimated
6,461MW by 2032.64
94 percent of the island population have access to electricity, with
generation mix comprising thermal at 72 percent, hydro (and other renewable energy
sources) at 28 percent. Sri Lanka having no proven fossil fuel resources has to rely on
imports to run its thermal power generation plants, transports and industry.
To meet its domestic energy needs Sri Lanka planned to import 500 MW from India as
discussed under ‗section 3 2 4 paragraph v‘ above via submarine link. Figure 3.2 illustrates
the project‘s connection layout
Figure 3.2 India-Sri Lanka Transmission Link
The possible completion of the plan would result in Sri anka‘s grid getting
connected to India, and resultantly in future also to the any possibly planned South
Asian energy grid and allow it to participate in electricity trade within the region.
Further it would provide Sri Lanka with better energy security situation.
63
World Bank, World Development Indicators: Growth of output. 2017. 64
Generation Performance in Sri Lanka Report-2016
18
3.3 Regional Energy Trade in South Asia
In 2010, total intra-regional energy trade was less than 5 percent of the total trade taking
place among the SACs.65
The previous section provided with energy profiles of the SACs
and summary of their energy trade with their neighbouring states, with India neighbouring
the most SACs and as a result having energy trade with majority of them. This section
would delve into the policies, actions and law that can be put in place a better regional
energy trade framework and infrastructure.
Some primary steps are required by SACs for betterment and growth of energy trade. The
SACs should start with cooperating more closely on integration of their energy markets
(electricity and gas interconnections), give open and competitive access to transmission
networks, concur on unified rules/protocols, and minimise energy trade related transaction
by agreeing on standardised transaction rules.66
An Asian Development Bank Study provided with a list of recommendations that it
suggested was necessary for putting in action regional cooperation in energy trade.67
The
suggestions were to develop in it words a ‗SAARC regional energy trade and cooperation
agreement‘ ‗harmonize legal and regulatory framework‘ develop a detailed energy
database recognize options for private sector participation and ‗augment regional
institutional capacity‘ 68
The Study suggested that regional energy trade agreement would provide policy objectives
and framework conditions for development of regional energy trade and in this regard
SACs can take reference from the ‗Greater Mekong Sub-region‘69
program policies
adopted for regional energy trade. The aforesaid program‘s policy objectives in context of
South Asia are listed as below: 70
65
ADB Energy Trade in South Asia 2012, p.37 66
ADB Energy Trade in South Asia 2012, p.92 67
Ibid. p.93 68
Ibid. 69
ADB supported Greater Mekong Sub-region Economic Cooperation Program supports the implementation
of high-priority projects in the six nations (Cambodia, China (specifically Yunnan Province and Guangxi
Zhuang Autonomous Region), Laos, Myanmar, Thailand, and Vietnam) that share the Mekong River.
70
ADB Energy Trade in South Asia 2012, p.93-94 (Direct Quotation)
19
(a) Promote efficient development of the SAARC energy sector;
(b) Promote opportunities for economic cooperation between SACs in the energy sector;
(c) Facilitate the implementation of priority energy sector projects;
(d) Address technical, economic, financial, and institutional issues relevant to SAARC
energy sector development; and
(e) Protect and improve the environment through the adoption of appropriate technologies
and plans.
Further of ‗harmonization of legal and regulatory frameworks‘ is of utmost importance to,
as each individual SAC‘s energy markets are governed by their own legal regulatory and
policy frameworks, and this inconsistency in laws and policies can lead to impediments in
regional energy trade resulting in economic loss to investors, undue increased cost of doing
business and slow processing of investment. The SACs already have in place institutional
structure, in this case energy regulatory bodies that can coordinate between each other and
facilitate the harmonisation process.71
The first step for the SACs in this regard would be to
a have a similar market structure in the energy sector. Further the SACs would have to put
in place energy regulatory bodies that have similar rules and roles in each state and would
be responsible for coordinating with its counterpart in other SACs. This can be followed by
SACs having a national framework that enables regional trade and the SACs agreeing to
have one regional energy regulatory agency that would have the role liaising and
coordinating between the national agencies and giving recommendations. The SAARC
Secretariat being of importance here, as it can initiate and oversee all this process with the
support of the SAARC Energy Centre.
Some important points that need to be noticed and addressed for harmonisation of legal
and regulatory framework for regional energy trade are of issuing and recognising energy
trade licences (generation, distribution or transmission licences) for cross border trade;
opening access to transmission system and coordinate its planning thus increase
competition in the regional power market and develop adequate capacity for power
exchange; have coordination in operation of power system by having a standardised grid
code; inclusion of agenda of regional energy trade in energy policy of all the SACs; have
71
ADB An Overview of Energy Cooperation in South Asia 2013, p.31
20
lax or exemption from tax and duties for regional energy trade and finally have dispute
resolution mechanism in place for issues arising out of regional energy trade.72
The harmonisation of laws would lead to a great stimulus for investors to fund projects in
regional energy trade as they would a have clear, unified and stable set of rules for doing
business in any of the SACs.
Regional trade in electricity can also be increased by employing the concept and structure
of a regional power market. The employment of regional power market will result in
trading of electricity between the SACs and resolve its shortage and over supply issues in
national networks. The graduation to a regional power market needs to be done in a phased
manner and thus interconnection between SACs would have to be increased incrementally.
The regional power market‘s efficient supervision and control will best be served by
having in place a central regional power exchange.73
Having a regional power market offers many benefits, including efficient use of energy
resources, decrease in investment in new generation capacity, lower cost of electricity due
to competition in the market, reduction in overall environmental impact and an outlet for
energy resource rich state to export its electricity. 74
India already has in place two
operational national electricity exchanges (India Energy Exchange and Power Exchange
India Limited), that allows bilateral and competitive electricity trade. The Indian power
exchanges can play the role of providing energy producers and consumers from other
SACs that connect to the Indian electricity grid a forum for regional electricity trade. 75
3.4 Interregional Energy Trade Projects
Currently energy trade between South Asia and rest of the world covers mostly importation
fossil fuels like oil, LNG and coal. Regional trade within South Asia in recent times
revolved mainly India and its energy trade (of different commodities) with its neighbours.
New trade options in the shape of projects to import energy especially in the form of gas
and electricity are being pursued and are discussed below.
72
Ibid. 73
ADB Energy Trade in South Asia 2012. p53
74 Ibid.
75 Ibid.
21
3.4.1 Electricity
i. Central Asia–South Asia Power Transmission Project (CASA-1000)
CASA- 1000 project was born in May 2006, with the aim of constructing 1,222 kilometre
power transmission line to export 1300 MW of electricity from Kyrgyz Republic and
Tajikistan (hydropower rich states)76
to Pakistan via Afghanistan. Funding and support
coming from World Bank and ADB, the project costing US$ 997 million and planned to
be completed by the year 2023.77
Tajikistan would be the consolidator of power, buying
energy from Kyrgyz Republic, and selling power to consumer through a ‗power purchase
agreements‘. To date construction of transmission lines has commenced in Tajikistan and
bids had been opened for construction of transmission lines and allied projects in
Afghanistan and Pakistan.78
Figure 3.3: CASA-1000 Transmission Network Map
.
76
The Central Asia Republics, including Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and
Uzbekistan, is well endowed with energy resources, including hydropower and natural gas, and formed a
strong electricity trading group in the past via interconnection through a common 500 kV power transmission
ring. With the demise of the Soviet Union, much of this trade disappeared due to decreased electricity
demand and drive for self-sufficiency in the CAR, but a significant interdependence still existed among them. 77
World Bank, Projects & Operations, Central Asia South Asia Electricity Transmission and Trade Project
(CASA-1000). 78
CASA-1000, Home.
22
3.4.2 Gas
i. Iran-Pakistan (IP) Gas Pipeline Project
The IP Project was originally born as trilateral project between Iran, Pakistan and India but
after India exiting from the project in 2009 it became a bilateral one.79
Iran having
significant natural resources of oil and gas (oil reserves in tune of 132 billion barrels and
natural gas reserves of 27.5 trillion cubic metres)80
has a potential to be large scale energy
exporter and energy partner of SACs. It initially planned to supply 55 billion cubic metres
per year (BCM/y) of (natural) gas. However, the gas volume to be supplied was later
revised down to 8.7 BCM/y. The estimated project cost was in the order of $7 billion in
2005. Iran has constructed the required natural gas transmission facilities from Asalouveh
to the Iran-Pakistan border including a 172 km pipeline. Pakistan according to the
agreement agreed with Iran (on January 30th
, 2013) had to commence the laying of 700 km
long pipeline to transport volume of up to 0.03 BCM/d from the Iranian border to
Nawabshah city in Pakistan.
Iran signed a natural gas export contract with Pakistan on 13 June 2010 to export 0.03
BCM/d of natural gas to Pakistan from 2014 on the basis that Pakistan would have its
section of pipeline commissioned by then. The model proposed for funding the pipeline
section in Pakistan was based on an integrated project structure with the Government of
Pakistan or a strategic investor taking a lead role in implementing the project. 81
But to date
there has been no progress on Pakistani side, one of the main reasons being US Sanctions
on the Iranian government, which has resulted in local and international companies to
avoid working on the project.82
79
United Press International, Pakistan gas pipeline is Iran's lifeline. 2010 80
ADB Energy Trade in South Asia 2012. p.46
81 ADB An Overview of Energy Cooperation in South Asia 2013. p.23
82 DAWN, IP gas project in limbo: Pakistan wants Iran to interpret sanctions. 2.01.2019
23
Figure 3.4: IP and TAPI Natural Gas Pipelines
ii. Turkmenistan Afghanistan Pakistan India (TAPI) Gas Pipeline
The TAPI gas pipeline project is ADB financed project that plans to bring natural gas from
energy rich gas fields of Turkmenistan to Afghanistan, Pakistan and India. Turkmenistan is
estimated to have the fourth largest gas reserves in the world at about approximately 14
trillion cubic meters, exports most of its gas to Russia, which is further sold to Europe.83
The project envisions a 1680 km, 0.09 BCM/d, pipeline from Turkmenistan through
Afghanistan and Pakistan to the Pakistan-India border. The estimated cost of the project
was stated at $7.6 billion in 2008. The project was initiated in December 2015 and aimed
to be completed by 2020, with work commencing in Afghanistan in 2018 and in Pakistan
in 2019.84
The TAPI parties agreed to share the gas in amount of 37,524 mcm each for
India and Pakistan and 14,160 mcm to Afghanistan.85
A gas pipeline framework agreement was signed in April 2008 by the respective ministers
and an intergovernmental agreement on the pipeline was signed on December 2010.
Bilateral gas sale and purchase agreement between Turkmenistan-Pakistan and
Turkmenistan-India were signed in May 2012 and between Turkmenistan-Afghanistan in
83
ADB Energy Trade in South Asia 2012. p.50
84 Trend News, President of Turkmenistan: construction of TAPI swiftly underway. 21.5.2019.
85 Reuters, TAPI gas pipeline to move forward after decades of delays. 13.11.2018.
Inter State Gas Systems, Turkmenistan – Afghanistan – Pakistan – India Gas Pipeline (TAPI).
24
July 2013.86
Afghanistan is expected to earn about $400 million per year in natural gas
transit fees when the TAPI project commences operation.87
The TAPI network passes through extremely demanding terrain, and further 830 km of its
section passes through Afghanistan that is a highly volatile region and thus can cause
possible limitations in construction and operational phases. 88
3.5 SAARC Laws and Energy Trade
The preceding sections provided introduction to energy profiles of SACs along with their
present and future regional energy projects, and discussed laws and policies that can be
implemented with objective of growth and improvement of regional energy trade. The
present section sheds light on important laws under the ambit of SAARC that relate to free
trade of goods, arbitration and electricity trade and their relationship with energy trade
within the region. The analysis of SAARC laws‘ provisions would also provide a better
understanding of how these laws will complement the ECT provisions (ECT analysis also
keeping SAARC laws in context discussed in Chapter 4) and add to framing of a Model
Treaty for energy trade in South Asia.
3.5.1 South Asian Free Trade Area
‗Agreement on South Asian Free Trade Area‘ (SAFTA Agreement) came into force in
2006, superseding the SAARC Preferential Trading Arrangement of 1993. The SAFTA
Agreement aims to promote and increase trade and economic cooperation between the
SACs.89
The SAFTA Agreement also affirmed that the SACs would abide by their rights
and obligations to each other under WTO and other agreements between them and is also a
WTO notified90
regional trade agreement.91
The SAFTA Agreement having the main ambit
of free movement of goods through elimination of tariffs and non-tariff restrictions on the
86
Ibid 87
ToloNews, All You Need To Know About TAPI Project. 23.2.2018. 88
ADB, An Overview of Energy Cooperation in South Asia 2013. p.51
89 SAFTA Agreement, Article 2: Achieving cooperation through concessions and guarantees given under it
90 WTO Notification (available at http://rtais.wto.org/UI/PublicShowMemberRTAIDCard.aspx?rtaid=188,
enabling clasue 4(a), Decision of 28 November 1979 (L/4903),
(https://www.wto.org/English/docs_e/legal_e/enabling1979_e.htm) 20.08.2019 91
SAFTA Agreement, Article 3(2)(b)
25
movement of goods. It directly refers to Article III of WTO GATT and the principle of
national treatment stated in it and its application to the member states.92
The SACs also agreed to take into consideration simplification of banking rules,
establishing transit facilities for intra-SAARC trade (the main beneficiaries being the land-
locked states of Afghanistan, Bhutan and Nepal), fair competitive rules for vibrant market,
and development of transport and communication network.93
The aforesaid aims of the
SAFTA Agreement also align with the objectives of the ECT namely of establishing and
supporting development of energy transit and transport facilities and having effective
competition policy in place.
The SAFTA Agreement (under Article 11) also provides for special and differential
treatments for its members that are classified as a ‗ east Developed Country‘ ( DC) by the
UN Economic and Social Council.94
Five member states of SAARC are classified as LDCs
namely, Afghanistan, Bangladesh, Bhutan, Maldives95
and Nepal. Member states have to
take in special regard to the situation of LDCs when contemplating application of anti-
dumping and or countervailing measures. The LDCs are also provided with flexibility in
continuing quantitative and other restrictions on imports from other member states for a
provisional time period. And member states agreed to compensate the LDCs provisionally
for predictable loss of their customs revenue due to trade liberalisation under the SAFTA
Agreement.
General exceptions to taking actions or adoption of measures for the enforcement or
contravention of provisions of the SAFTA Agreement are in case of protection of national
security, public morals, human, animal, plant life and health and articles of artistic,
historical and archaeological value.
SAFTA also provides for a dispute settlement mechanism (under its Article 20), with a
Committee of Experts made responsible for settling the dispute between the states. The
Committee of Experts gives a recommendation that can be appealed to the SAFTA
Ministerial Council.96
92
Ibid., Article 6 93
Ibid, Article 8 94
UN Economic Analysis and Policy Division, LDCs at a Glance. 95
Maldives given the status of the LDC by SAARC under Article 12 to the SAFTA Agreement. 96
The organisational structure and mandate of the Committee of Experts and SAFTA Ministerial Council are
defined under Article 10 to the SAFTA Agreement.
26
-Trade Liberalisation Programme
The SAFTA Agreement implementation is made possible through a number of stated
instruments, one of them being ‗Trade iberalisation Programme‘ that is of relevance of
here in energy trade context.97
The Programme provides for a schedule of tariff reductions
by non-LDCs98
and LDCs over a defined period of time.99
The non-LDCs having to make
higher tariff reductions than the LDCs. Further the Programme provides for members to
the SAFTA Agreement to exclude its application to goods included by them in the
sensitive list (integral part of the SAFTA Agreement). The sensitive list has to be reviewed
every four years with aim of reducing goods on the list.
The sensitive list has been identified as one of the major reason besides other reasons for
the overall ineffectiveness of the SAFTA Agreement in reaching its full potential.
Sensitive list has been identified as being responsible for restricting 35 percent of the intra-
SAARC imports as recent as 2015.100
This is in contrast to neighbouring free-trade region
of ‗Association of Southeast Asian Nations‘; where on average countries have zero import
duty on 96 percent of the imports.101
All the SACs have different nature and number of goods on their sensitive lists, which also
in some cases have energy resources listed. The energy resources listed in each SAC‘s
sensitive list vary. The adoption of ECT provisions would necessitate the SACs reviewing
their sensitive lists and deleting energy resources from the list, where necessary. In the
following paragraphs the SACs listing of energy resources in their sensitive list is briefly
analysed.
Afghanistan lists energy resources like coal, oil, natural gas and electricity on the sensitive
list; meaning that if Afghanistan was to import energy from other SACs it would attract
application of equal tariffs as on energy from non-SAFTA Agreement countries. To date
Afghanistan imports energy from Iran and its Central Asian neighbours and will provide
transit to electricity and gas to Pakistan. If in future Afghanistan plans to import energy
97
SAFTA Agreement Article 4 98
Non-LDCs being India, Pakistan and Sri Lanka 99
SAFTA Agreement Article 7: Trade Liberalisation Programme 100
A Glass Half Full, p.98 101
World Bank Blogs, How South Asia can become a free trade area.
27
from other SACs it would have to remove the energy resources from the sensitive list to
fulfill objective of the SAFTA Agreement.
Bangladesh has only has listed petroleum oil derived from bitumen on its sensitive list,
meaning all other energy resources fall under the trade liberalisation programme.
Bangladesh imports electricity from India, that benefits from reducing tariffs over a period
of time according to the programme.
Bhutan has only listed coal on its sensitive list. It imports all its oil and related products,
and gas needs from India that benefit from reduced tariffs.
India does not have any major energy resource on its sensitive list and only applies 5
percent duty on energy resources imported from the other SACs. Its main energy import
being in the form of electricity from neighbours, Bhutan and Nepal.
Maldives does not include energy resources on the sensitive list and has zero percent duty.
This being explainable because of geographically isolated location and being totally reliant
on imported fossils fuels to meet it majority of its energy needs. But to date it does not
import any energy resources from other SACs, and all its energy imports are from United
Arab Emirates, Malaysia and Singapore. 102
Nepal has majority of the energy resources on the sensitive list with the exception of
bitumen and electricity. Nepal sole energy trade partner is India, which supplies it with all
its oil and gas needs and also electricity in winter season.
Pakistan has no energy resources included on the sensitive list and percentage of duty on
energy resources decreasing yearly. The can be explained by Pakistan‘s requirement for
huge amount of energy to meet its energy shortfall. Pakistan in the near future is only
planning to get electricity and gas from Central Asia via Afghanistan.
Sri Lanka lists all energy resources on the sensitive list. To date it imports 40-50 percent of
diesel oil from India for use in power generation and transport sector and does not have
any energy imports from other SACs. 103
The overview of the SAC‘s sensitive list makes its evident that for energy trade to prosper
between the SACs they have to remove energy goods from the sensitive list or consult to
102
SAARC Energy Outlook 2030, p.162 103
Ibid. p.227
28
have a common tariff that would also be in compliance with the future provisions of treaty
based on the ECT.
3.5.2 SAARC Arbitration Council
SAARC Arbitration Council (SARCO) was established in 2005 by signing of the
‗Agreement for Establishment of SAARC Arbitration Council‘ on November 13 2005 at
Dhaka with the objective of providing a legal framework for settlement of commercial,
investment and other disputes referred by parties to it, through the medium of conciliation
and arbitration and also act as coordinating agency in the SAARC dispute resolution
system.104
SARCO provides for any business entity or entities from the SACs to approach for
resolving their dispute under its aegis if the agreement between the parties provides
recourse to it in case of a dispute The SARCO in this regard provides for a ‗model
arbitration clause‘ that can be added to an agreement Thus one of the parties can initiate
arbitration by filing a request with SARCO for it. After the claimant party‘s notice and the
respondent‘s party reply to it they have to appoint an arbitrator or a panel of three
arbitrators. The parties have to agree on the appointment of arbitrator/s that they are free to
choose from ‗panel of arbitrators‘ (made up of arbitrators exclusively from the SACs) kept
with the SARCO, or any other arbitrator/s they find appropriate. In case of disagreement
between the parties, the SARCO can appoint arbitrator/s. SARCO is obliged to give an
award within six months, which can be extended by consent of parties. The dispute brought
before SARCO can be of regional or domestic nature.
The SARCO Agreement provided for enactment of rules on conciliation and arbitration
under it. Thus, the SAARC Rules for Arbitration and Conciliation were enacted in 2016,
based on the UNCITRAL Model Law105
, and in specific UNCITRAL Arbitration and
Conciliation Rules.106
The SAARC Rules provide for a necessary mechanism for effective
and efficient carrying out of arbitration/conciliation proceedings. 107
104
SARCO Agreement Article II 105
UNCITRAL Model Law on International Commercial Arbitration 1985, with amendments as
adopted in 2006.
106
UNCITRAL Arbitration Rules(with new article 1, paragraph 4, as adopted in 2013)
UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements
Resulting from Mediation, 2018 (amending the UNCITRAL Model Law on International Commercial
Conciliation, 2002)
29
An arbitration award given under the Arbitration Rules is final and binding on the parties
and they are to give it effect without undue delay (Article 36 of the Rules). Employment of
Arbitration Rules for resolving dispute provides with effective enforcement and
compliance of the decision/award as the parties are signatories to SARCO Agreement and
SACs are also signatories to the ‗Convention on the Recognition and Enforcement of
Foreign Arbitral Awards.108
Further SARCO Agreement and Rules can also a play a vital role in supporting dispute
settlement mechanism under SAFTA, and it also is provided as option for dispute
settlement option for issues arising around Framework Agreement (discussed in the section
below in more detail). The SARCO Agreement can be provided as an alternate option
under SAFTA Agreement for dispute settlement by its inclusion or adoption into the
aforesaid (in compliance with Article 3(2)(a) and Article 4(6) of SAFTA Agreement that
allow adoption of additional rules and protocols). 109 110
3.5.3 SAARC Framework Agreement for Energy Cooperation (Electricity)
SAARC Framework Agreement for Energy Cooperation (Electricity) (Framework
Agreement) was signed at the 18th
SAARC Summit held in Nepal in November 2014 by all
the SACs with the objective of promoting cross border electricity trade between them that
would result in energy efficiency and conservation, better energy security and resultant
economic cooperation in related industries.
107
SARCO Rules available at http://sarco.org.pk/arbitration-rules/ and http://sarco.org.pk/conciliation-rules/ 108
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958, in
force 7 June 1959, United Nations, Treaty Series , vol. 330, p. 3.
109 Article 3: Objectives and Principles
2. SAFTA shall be governed in accordance with the following principles:
a) SAFTA will be governed by the provisions of this Agreement and also by the rules, regulations,
decisions, understandings and protocols to be agreed upon within its framework by the Contracting
States;
Article –4: Instruments
The SAFTA Agreement will be implemented through the following instruments: -
6. Any other instrument that may be agreed upon.
110 Agarwal 2018, p.11-15.
30
The use of the term ‗framework‘ signifies the agreement‘s nature of being foundational in
nature, which is further evidenced by the language used in its‘ provisions. The language of
the provisions being in most parts non-imperative that allows the SACs freedom to abide
or not by the obligations. The Framework Agreement would hence require to be
supplemented by more comprehensive legal texts/agreements having enforceable and
imperative obligations.
As highlighted above the Framework Agreement‘s objective is to promote cross border
electricity trade, which the member states are obligated to do on ‗voluntarily basis‘.111
Thus aforesaid objective stated in Article 2 to the Framework Agreement provides the
party with the liberty to participate or not in bilateral or multilateral projects concerning
electricity trade.
The Framework Agreement follows with provisions that encourage and promote electricity
trade. It provides for SACs to work towards having exemption from duties and taxes, and
non-discriminatory access to transmission grids, for electricity trade.112
SACs may
facilitate companies to enter in agreements with transmission providers and also start the
process of opening the national electricity markets for competition.113
Plan cross border
grid interconnections between each member states transmissions agencies and implement
these through bilateral or multilateral agreements.114
Enable joint development of
coordinated network protection systems and coordination procedures to ensure reliability
and security of interconnected grids.115
Encourage knowledge sharing and joint research,
on electricity related issues.116
SACs shall develop the structure, functions and institutional
mechanisms for regulatory issues related to electricity exchange and trade.117
It also provides a dispute settlement provision that states that if a dispute arises around
‗interpretation and/or implementation‘ of the Framework Agreement then the SACs will
resolve the issues amicably and if unresolved than they may choose to refer to arbitration
111
Framework Agreement, Article 2 112
Ibid., Article 4 and Article 12 113
Ibid., Article 9 and Article 6 114
Ibid Article 7 115
Ibid Article 10 and Article 11 116
Ibid Article 14 117
Ibid Article 15
31
under SARCO.118
As identified by Kevin Lee the provision provides an obligation for
dispute settlement but is missing on a full-scale dispute settlement mechanism.119
To fill the void of full-fledged dispute settlement mechanism, the SAARC commissioned a
study that would develop a dispute settlement mechanism for the Framework Agreement.
The study highlights a number shortcomings and uncertainties in the Article 16 to the
Framework Agreement dispute settlement framework provision. Firstly the provision is
silent on the time period that would be available to resolve the dispute before referring to
SARCO. Secondly the provision does not provide the applicable procedure or requirements
for a party to refer the dispute to SARCO. Thirdly it leaves the question open for the
dispute settlement method that SARCO (arbitration and conciliation being available) will
employ and how the parties can choose between them. And finally the provision is silent
on a number of important procedural and substantive legal issues that arise in inter-state
dispute settlement. E.g. what would be substantive law applicable to dispute, procedure for
different phases of dispute resolution and mandate of adjudicators.120
The study keeping the above mentioned shortcomings in scope produced a template
dispute settlement mechanism (annexed to the study) that could be adopted by SAARC.
The template could be applied by SACs for settling of disputes arising out of Framework
Agreement and supplement Article 16, its application being made possible by adopting it
as an international agreement under SAARC. The template could also be utilised more
generally by the SACs for resolving of inter-state disputes. 121
The final provisions of the Framework Agreement provide that any SAC can withdraw
from it at any time, with the withdrawal being effective six months from the day the
written notice is received by the SAARC Secretariat. But the withdrawing SAC being
liable to participate in any on-going proceeding they are involved in.122
Amendments can
also be made to the Framework Agreement by any SAC submitting an amendment
recommended by consensus of the meeting of SAARC Energy Ministers to the SAARC
118
Ibid Article 16 119
Lee 2017, p.111 120
Ibid, p.114-115 121
Ibid. p.117-118 122
Framework Agreement, Article 17
32
Secretariat. The amendment would become effective upon being accepted by the SAARC
Secretary General.123
123
Ibid., Article 19
33
4 MODEL TREATY
The ECT has its genesis in the European Energy Charter (1991), that signified a political
intent to promote energy cooperation between western European states and the recently
independent (energy resource rich) Eastern European states.124
The ECT came into force in
1998 being the only international multilateral treaty that regulated energy trade between its
signatories and also complied with the WTO rules.125
The ECT provisions focus on mainly
five areas of providing protection and promotion of energy investment; free trade of
energy; freedom of energy transit, energy efficiency; and dispute settlement mechanisms
for disputes between investor and state and between state and state. 126
The main provisions and elements within the ECT that are relevant for adoption into a
Model Treaty (MT), are analysed and discussed in the following sections (in the context of
energy trade in South Asia).The main focus of the analysis being on energy transit,
investment protection and dispute settlement.
Energy transit provision requires perusal as presently energy trade in South Asia is
regulated by national laws and bilateral agreements that do not specifically cater towards
energy transit. Further the growth of energy trade within the region would require energy
to be transited through more than one state (e.g. the TAPI gas project envisions natural gas
transiting through Afghanistan and Pakistan to India) and having an effective transit
regime in place would be crucial.
Besides energy transit provision, investment protection as also of importance as energy
infrastructure ranging from power generation to gas transit pipelines are capital intensive
and proper investment regime would provide investors with assurance that their investment
would be financially and physically protected. Further investment protection regime is also
relevant in South Asia, where there is sometimes high risk of political instability and
tensions escalating between neighbouring state and its presence would improve investor
confidence to invest in the region. And the dispute settlement provisions provides avenue
for investors for protection of their investment and states to resolve disagreement between
them on treaty interpretation and implementation. The Article 26 of the ECT providing for
124
Konoplyanik-Wälde 2006, p.523-558
125 Some of ECT‘s main provisions being based on WTO GATT and also NAFTA
126 Konoplyanik-Wälde 2006, p.523-558
34
investor to protect their investment by taking recourse to dispute resolution arbitration
options. And the second dispute settlement provision of Article 27 to the ECT on the
contrary provides for states‘ to take their dispute regarding treaty implementation and
interpretation to an ad-hoc tribunal setup under the auspices of the Permanent Court of
Arbitration at The Hague. Thus the ECT caters to both disputes relating to investment and
treaty interpretation in separate provisions.
4.1 Definitions and Objectives
4.1.1 Definitions
Important concepts related to energy sector are defined in the Article 1 to the ECT that
would also be relevant for the MT. The ECT provides the terms of ‗Energy Materials and
Products‘ and ‗Energy-Related Equipment‘ for energy goods which come in different
natural states, and also materials and tools used for energy‘s storage, transportation,
exploration and other related usages.127
‗Energy Materials and Products‘ list downs energy
resources under the headings of nuclear energy, coal, natural gas, petroleum and petroleum
products, electrical energy and other energy, which are further elaborated under the each of
the respective headings. These aforesaid headings cover all major form of energy goods
that are internationally traded. ‗Energy-Related Equipment‘ has much longer list covering
common known energy storage and transportation items such as pipes, tubes, cables and
storage tanks to specialised apparatus (e.g. polarimeters, refractometers and spectrometers)
to analyse energy materials.
Natural gas and electricity are the most common ‗energy materials and products‘ being
traded presently and would also be in future in South Asia as highlighted by the projects in
previous chapters 3.2 and 3.4. Further the employment of technology and materials for
constructing gas pipeline and electricity grid projects would also find mention under the
heading of ‗Energy-Related Equipment‘ Thus the adoption of the ECT terms for energy
goods and related equipment would provide the MT with comprehensively defined terms.
127
Article 4 Annex EM I or II: Energy Materials and Products
Article 4bis Annex EQ I or II : List of Energy-Related Equipment
The two above stated terms are defined by relaying on items listed in ‗Harmonised System of the World
Customs Organization‘ and are annexed to the ECT
35
On the subject of energy investments, the ECT defines the terms ‗investor‘ and
‗investment‘.128
Investor is defined as being a natural or legal person from a Contracting
Party (CP) to the ECT or a third state.129
And investment is defined in broad terms as ‗every
kind of asset owned or controlled directly or indirectly by an investor‘ in the area of CP
and associated with an economic activity in the energy sector.130
Inclusion of the definition
for terms related to investments in the MT is elemental as the one of its focus areas would
be on protection of energy investment.
The concept of area is important one in realm of energy trade and transit and is defined as
territory (land, internal water and territorial sea) over which a CP has sovereignty. The
territorial sea is defined in reference to the UN Convention on the Law of the Sea
(UNCLOS)131
.132
The definition of area in the ECT would also be applicable to the MT
especially in regards to the territorial sea as five of the SACs have access to sea.133
States
have sovereignty over their territorial sea and hence can carry out exploration and
exploitation of any energy resource within it. Further construction of projects like under
sea pipelines or cables in a state‘s territorial sea for transporting natural gas or electricity
would require the respective state‘s permission and abiding by its rules . The planned
project of supplying electricity to Sri Lanka from India (see section 3.2.8) via undersea
cable would also cross the two countries territorial sea and respective laws would apply.
4.1.2 Objectives
The ‗objective and principles‘ of the ECT are not stated in it, and reference is made
objective and principles contained within Title I of the European Energy Charter. The
objectives of the ECT are development of open and efficient energy markets; creation of
conditions favourable for energy investment by private parties; security and diversification
energy supply; provide energy related policy and legal framework assistance to countries
in economic transition. The principles of ECT are non-discrimination between parties that
128
ECT in Article 1(6) and 1(7) 129
ECT Article 1(7), Natural person: national, citizen or permanent resident and legal person: company or an
organisation. 130
ECT Article 1(6), The term of asset is stated to include among others economic concepts property,
company, shares, claims, returns etc. 131
United Nation Convention on the Law of the Sea Montego Bay, December 10 1982, in force November
16 1994. 132
ECT Article 1 (10)
133 Coastlines of SACs: Bangladesh 580 km, India 7000 km, Maldives 644km, Pakistan 1046 km, Sri Lanka
1340 km.
36
is based on the ‗national treatment‘ and ‗most-favoured nation‘ treatment; openness (of
international energy markets); transparency; and confirmation of the principle of
sustainable development and state sovereignty over natural resources.134
The purpose (objectives and principles) of the ECT broadly align and overlap with the
objectives and principles of SAARC legal framework. The SAARC Charter agreed to the
objectives of accelerating economic growth in the region based on mutual trust, while also
recognising the principles of sovereign equality and mutual benefit being the basis for
cooperation, and the cooperation being complement to and consistent with bilateral and
multilateral obligations.135
Further the SAFTA Agreement provided the SACs to
strengthen intra-SAARC economic cooperation, respecting principles of sovereignty,
equality, independence and territorial integrity of the states involved. Its objectives and of
mutual trade and economic cooperation, elimination of trade barriers, facilitation of
movement of goods between areas, and fair competition and trade. Application of SAFTA
rules applied on principles of reciprocity and mutuality of advantages to benefit all parties
equally.136
And the SAARC Framework Agreement recognizes the importance of
electricity in economic growth, and thus the need to promote regional power trade, energy
efficiency, energy conservation, and knowledge sharing.
The objectives and principles of ECT and SAARC rules highlighted above would provide
for solid base for any legal regime to be formulated for energy trade. And there adoption
(in the form of legal agreement) by SACs would provide for the much needed impetus for
regional energy trade growth on solid foundations The principles of non-discrimination,
free market, transparency, sovereignty over natural resources among others are necessary
for attracting investment and providing a level playing field to all parties involved. Further
the objectives provide the parties with agenda to achieve by formulating the necessary
policy and laws.
4.2 Sovereignty over Energy Resources
The concept of sovereignty is defined by Jennings and Watts as of ―comprising power of
state to exercise supreme authority over all persons and things within its territory,
134
Leal-Arcas 2018, p.54.
135 SAARC Charter.: Article I- Objectives and Article II- Principles
136 SAFTA Agreement :Article 3 -Objectives and Principles
37
sovereignty involves territorial authority‖ and also not subjugating to authority of another
state.137
Further in specific energy sovereignty can be defined as the ability of a state to
have the authority to control, regulate and manage its own energy resources.138
The ECT (in Article 18) also recognises the concept of a state having sovereignty and
sovereign rights over its natural resources that is well embodied in international law.139
The
sovereignty over energy resources covers both land and sea based energy resources.140
It
also further obligates the CPs to ‗facilitate‘ access to their energy resources in a non-
discriminatory manner for the purpose of exploring, exploiting or extracting to the
investors.141
The inclusion of this provision in ECT provides the clarification that the
provisions of the ECT would not interfere or prejudice with a state‘s right to manage its
‗property ownership of energy resources‘ And thus the investors cannot use the ECT
provisions to encroach on to a state‘s sovereignty over its energy resources
The concept of state sovereignty over natural resources has also been codified in
constitutions of modern day states. The constitutions of the eight SACs likewise directly or
indirectly refer to the state sovereignty over natural resources, using different legal
language but referring to the same concept Afghanistan‘s constitution asserts that all
‗subterranean resources‘ shall be property of the state and their management and utilization
regulated by law. 142
Bhutan‘s constitution provides that ‗mineral resources‘ are vested in
and are property of the state;143
and also all are minerals underlying the land or ocean
(territorial waters or continental shelf).144
The constitutions of India and Pakistan also
provide for the state having ownership of minerals within the territorial waters or
continental shelf. 145
India further also mentions having ownership of minerals found
within the exclusive economic zone and Maldives‘ constitution likewise provides that all
137
Jennings, Robert–Watts Arthur (eds) Oppenheim‘s International aw Vol 1 Peace 9th
edition. Longman
1992, p.382-384.
138 Ariza-Montobbio, Pere. Energy sovereignty: politicising an energy transition.
139 Which can been evidenced in UN General Assembly Resolutions No.1803 (XVII), 3171 (Paragraph 1
affirmation of sovereignty over waters supported by UNCLOS Article 2(1)), 3281 (XXIX ) (Paragraph 2) and
3201 (S-VI) (Paragraph 4 (e)).
140
UNCLOS being of importance in sea based resources
141 ECT Article 18(4)
142 Constitution of Afghanistan 2004, Article 9
143 Constitution of Bhutan 2008, Article 1, para.12
144 Constitution of Bangladesh 1972, Article 143
145 Constitution of India 1949, Article 297. Constitution of Pakistan 1972, Article 172.
38
natural resources (including petroleum and gas) within the exclusive economic zone vest in
the state. 146
Sri Lankan and Nepalese constitutions make indirect reference to the concept
of state sovereignty over natural resources, and the concept is found mentioned in implied
terms. In Sri Lanka only the state parliament has the prerogative to legislate in the matter
of ―oil fields and mineral oil resources, petroleum and petroleum products‖, and in Nepal
‗management excavation and exploration‘ of mines and mineral falls under the shared
jurisdiction of state and regional governments. 147
The aforesaid jurisdiction given to the
parliament and state structures over natural resources in Sri Lanka and Nepal are evidence
of the concept in implied terms in the constitutions.
The presence of the concept of state sovereignty over energy resources in the SACs
constitutions as highlighted above already makes the constitutions in sync with the ECT
sovereignty provision. The inclusion of the sovereignty provision in the MT will re-stress
the concept at a regional level between the SACs, and provide the them with the liberty on
managing their resources within their territories by deciding the area to explore and
develop, the exploitation rate, rate of royalty, and environmental and safety regulations.
Further the coastal SACs (with constitutions of Bangladesh, India, Maldives and Pakistan
making direct references to submarine natural resources) have also sovereign rights over
the energy resources within the continental shelf, territorial sea, contiguous zone and
exclusive economic zone backed by the UNCLOS, the ECT sovereignty provision adopted
in to the MT and their respective constitutions.
4.3 Transit
The Article 7 provision on ‗transit‘ is one of the most innovate and important elements of
the ECT and of great relevance to the international and regional energy trade.148
The transit
provision refers to principles of ‗freedom of transit‘ and non-discrimination, and is based
on Article V of GATT. While GATT Article V does not explicitly refer to covering energy
146
Constitution of Maldives 2008, Article 248 147
Constitution of Sri Lanka 1978, List II.Reserved List of the Ninth Schedule.
Constitution of Nepal 2015, Schedule 5 to 9. Power between federal, state and local level 148
Selivanova- Ehring 2012, p.82.
39
transit that happens via fixed infrastructure or grid bound energy transport, the ECT
expressly refers to the aforesaid under the term of ‗energy transport‘ facilities 149
ECT defines transit as carriage through an area of an ECT party, of energy materials and
products originating in the area of another state and destined for the third state. For ECT it
is enough the transit state and one of the other state is CP to the ECT.150
Article 7(10) also
covers carriage of energy through a one CP‘s area, that originated and is destined for
another CP‘s area. This is the case being where the same country is the origin and
destination state. E.g. Transit through Kyrgyzstan of Uzbek transit routes.
Article 7(1) requires government to take ‗necessary measure to facilitate‘ energy transit
without distinction based as to origin, destination or ownership of such energy or pricing
on such distinction. This provision gives little excuse to the state to deny permission and
support to investor to build new facilities if they are in compliance with the local
obligations.151
Article 7(2) states that CP‘s ‗shall encourage relevant entities‘ to cooperate in
modernizing, developing and operation of energy transit facilities and take measure to
mitigate effect of interruption of supply. This provision‘s legal effect is soft in nature,
while providing enough enforcement and being flexible in requiring solid results.152
The
presence of this provision in MT, would allow organisations involved in the energy sector
across the South Asian region to cooperate, and provide under-developed markets with
much needed economic and technical input.
Article 7(3) states the transit state provisions relating to energy transit and use of energy
facilities shall treat energy in transit in ‗no less favourable manner than its provisions treat
such energy originating in or destined for its own area‘ This aforesaid provision is more
clearly defined by Selivanova as requiring ‗non-discrimination of transit as compared to
the treatments of imports or exports and also compared to transportation between domestic
locations‘ And holding the view that Article 7(3) is more ambitious and different standard
149
‗Energy transport facilities‘ are defined as consisting of ‗high-pressure gas transmission pipelines,
high-voltage electricity transmission grids and lines, crude oil transmission pipelines, coal slurry
pipelines, oil product pipelines and other fixed facilities specifically for handling energy‘ [ECT Article
7(10)(b)]
150 ECT Article 7(10)
151 Selivanova- Ehring 2012, p.84
152 Ibid, p.85.
40
of national treatment type non-discrimination than GATT transit provision.153
In the case
of South Asia, electricity transiting through Afghanistan from different Central Asian
states has to be treated on equal terms between themselves and locally transported
electricity.
Further Article 7(4) obligates the transit state not to put hindrances in construction of new
facilities to supplement existing energy infrastructure and cannot refuse just on the basis of
origin, destination or ownership. The transit state is also not obliged to allow new or
modification of transit infrastructure or new or additional transit through existing network
if it would endanger security and efficiency of energy systems and security of supply.154
Thus in other terms the Article 7(5) provision acknowledges sovereign rights of any CP
both over energy infrastructure and right to regulate by national law, any aspect concerning
environment protection, land use etc.155
This provision in South Asian context is of great
relevance, where volatile political relationship between neighbouring countries especially
India and Pakistan can lead obstacles to development of cross border energy infrastructure.
Thus this obligation to not place hindrances based on origin, destination or ownership
provide the energy infrastructure owner and energy consumer with assurance of constant
supply of energy and earnings.
Article 7(4) is complemented by Article 7(9) that states that transit state is not obligated to
take any measure for a certain type of energy facility if it does not have it in existence,
while being obligated to abide by Article 7(4). Thus new facilities can only be setup if they
are in compliance with Article 7(4) and 7(1). E.g. If a state does not have a LNG facility,
and its local laws don‘t allow it and apply equally to local and foreign investor, then a
foreign investor cannot make use of the Article 7(4) or 7(1).
4.3.1 Conciliation Procedure under Article 7(7)
Article 7 provides for its own specific conciliation procedure to resolve disputes relating to
energy transit and for parties to refer the dispute or related issue by notification to the
Secretary General of the ECT Energy Charter Secretariat, which will appoint a conciliator
153
Ibid. p.91 154
ECT Article 7(5) 155
Leal-Arcas 2018, p.105
41
with consultation of all parties. The conciliator has ninety days to reach resolution
agreement between parties and if unsuccessful than recommends a resolution unilaterally
and decides the interim tariffs and other terms and conditions to be observed for the transit.
The CPs are obligated to observe and also ensure the observance by entities under their
control to interim decision for 12 months following conciliator‘s decision
The conciliation procedure to date has not been employed in any transit dispute. During the
Russia-Ukraine gas dispute in 2009, the conciliation procedure was not used by the parties
even when its option and use and appointment of a conciliator was offered by the Secretary
General of the Energy Charter Secretariat.156
The dispute was rather resolved through
political means. This failure of the conciliation procedure, when adopting the provision for
South Asia could be mitigated by having a reference to be made to SARCO or the SAARC
Secretariat by the parties to resolves dispute.
The Conciliation procedure bears a character of mitigation rather than adjudication, and
provides an intermediate solution to dispute, rather than a permanent decision one gets
from arbitration mechanisms.157
Major initiative for using conciliation provision is that it
applies only after exhausting of all relevant contractual or other dispute resolution
mechanisms agreed by parties.
4.3.2 Transit Protocol
Transit Protocol (Protocol) was negotiated by ECT CP‘s to supplement the Article 7 transit
provision but has been in draft form since 2003, when negotiations over it were suspended.
The three main issues that led to suspension and were left unresolved were related to long-
term capacity booking, congestion management (tariffs cost and auctions), and inclusion of
the clause that would have the effect of the Protocol not applying within the European
Union.158
The Protocol‘s objectives were to ensure ‗secure efficient and unimpeded transit‘
(highlighting the principle of security of supply), promotion of transparency and non-
discrimination in providing access to available transit capacity, facilitating construction of
156
Pirani-Stern-Yafimava 2009, p.16.
157 Selivanova- Ehring 2012, p.92.
158 Energy Charter Secretariat, Transit Protocol. 10.4.2015
42
energy facilities, while keeping environmental impacts to minimum and providing
effective dispute settlement. 159
Some of the main provisions of the Protocol are examined in proceeding passages. The
Protocol obligated the transit state to prohibit unauthorised taking or interfering of energy
materials in transits.160
CPs were required to have in place ‗objective, transparent and non-
discriminatory‘ authorization procedures as to the origin, destination and ownership for the
construction, expansion, extension, re-construction, and operation of transport facilities the
measures being no less favourable than measures used for internal transportation.161
The
aforesaid obligation thus ensured level playing field for local and foreign in the realm
transit facilities.
The Protocol in Article 10 also delved on the subject of transit tariffs that are usually the
most contentious issue relating transit disputes.162
CPs were obligated to ensure that transit
tariffs were ‗objective, reasonable, transparent and did not discriminate on the basis of
origin destination or ownership of energy materials‘ to ensure that tariffs not affected by
market distortions, in particular those resulting from abuse of a dominant position by any
owner or operator of transport facilities. Further tariffs should be based on operational and
investment costs, including a reasonable rate of return and determined by means including
regulation, commercial negotiations or congestion management mechanisms. The transit
tariff provision thus provides the consumers with a fair market value for energy prices and
the energy supplier a tariff rate that is not discriminatory or effected by unfair competition.
Article 15 of the Protocol could read in conjunction with Article 7(6) ECT. It obliges the
CP to ensure that no owner of energy in transit under its control refuses to negotiate in
good faith, on the basis of transparent and non-discriminatory procedures to supply energy
to the transit state and failure of negotiations should not lead to refusing to or reducing
transit volumes, or access to available transit capacity.
159
Draft Transit Protocol, Article 2 160
Draft Transit Protocol, Article 6 161
Ibid., Article 9 162
Selivanova- Ehring 2012, p.96
43
Besides the Transit Protocol discussed above the Energy Charter Conference also has
drafted model agreements related to cross-border pipelines and electricity projects that can
be adopted for state to state and investor to state agreements.163
4.3.3 Adoption of Transit Provision into the Model Treaty
The transit provision as highlighted above is a crucial part of the ECT and adopting it in to
the MT would be elemental. Transit provision in the MT could also adopt provisions
present in the Protocol especially relating to transit tariffs. The conciliation procedure
provided under Article 7(7) provides for quick resolution to transit disputes than the other
dispute resolution options but its non-adoption to date by any party highlights its non-
existent efficacy in the matter. Thus, the MT can replace the conciliation procedure with its
own mechanism e.g. In the case of transit dispute arising, parties can refer the dispute to
arbitration under the aegis of SARCO or to the Secretary General of SAARC, who could
play the role of mediator between the parties. The mediation process under the SAARC
Secretary could also involve representative of other member states of SAARC. The
mediation process thus would be less formal and lead to faster resolution of transit dispute.
The 2009 Ukraine gas dispute is a good example of dispute being resolved in short period
of time using a direct and political forum.
Transit provisions would also provide uniform transit law for regional energy projects in
South Asia that are under construction and until now are being governed by bilateral
agreements or domestic laws. E.g. gas to be supplied under the TAPI project transiting
three states before reaching India would benefit from the uniform transit provision in
place; in this case Turkmenistan and Afghanistan are already parties to the ECT.164
4.4 Investment
The main part of the ECT deals with investment protection (Part III to the ECT), and
breach of the investment obligations can only exclusively be resolved under the arbitration
163
Energy Charter Model Agreements available at https://energycharter.org/what-we-do/trade-and-
transit/model-agreements/ 164
Energy Charter Secretariat. Members and Observers to the Energy Charter Conference. 17.10.2018
44
provision of Article 26 of the ECT brought forward by an investor. The investment
protection provisions only provide protection for investment made in the energy sector.165
The objective of the investment provisions is to establish equitable conditions for
investment in the energy sector with the objective of limiting and reducing the non-
commercial risk associated with energy investments.166
The equitable conditions are
created by the host state treating investments on the principle of non-discrimination,
national treatment and most-favoured nation in comparison to investments from national
entities or other CP states. The ECT divides investments into two phases providing
different levels of protection under each. The first phase of pre-investment has soft law
obligations that are flexible and broad in nature. And the second phase of post-investment
has hard law obligations that are binding in nature and the main obligations for investment
protection under the ECT.167
The post-investment hard law obligations are set out in Article 10 to the ECT, which
embody a number of basic principles and standards for treatment and protection of
investments, also found in bilateral investment treaties (BITs) and investment arbitral
awards.168
The SACs have also numerous BITs in force with the outside region and between
themselves making the SACs already aware of the basic principles and standards of
investment.169 Between the SACs there are five BITs in force. Three were signed by India
with Bangladesh (2009), Nepal (2011) and Sri Lanka (1997), and two were signed by
Pakistan with Bangladesh (1995) and Sri Lanka (1997). All the five aforementioned BITs
provide investments with the fair and equitable treatment, national and most-favoured
nation treatment, non-discrimination, compensation for losses and protection against
expropriation among others. And in the case of a dispute arising, recourse to the
‗International Centre for Settlement of Investment Disputes‘ (ICSID)170
or an ad-hoc
tribunal setup under the rules of UNCITRAL. The aforesaid BITs define ‗investment‘ in
general terms and thus investments in energy sector would not enjoy the level of protection
165
ECT Article 1(6)(f) 166
Hober 2007, p.327 167
Ibid. p.328 168
Konoplyanik - Wälde 2006, p.534 169
BITs available at : https://investmentpolicy.unctad.org/international-investment-agreements 170
ICSID established pursuant to the Convention on the Settlement of Investment Disputes
Washington, 18 March 1965.
45
provided under the ECT regime. The adoption of investment definition (discussed under
section 4.1.1) along with its investment protection provisions of the ECT into the MT
would provide the SACs with an energy relevant investment regime.
The basic principles and standards of investment found in Article 10 to the ECT are
discussed below.
4.4.1 Principles and Standards of Investment Protection
i. Fair and Equitable Treatment
The obligation provides for fair and equitable treatment at all times to an investment.171
The scope and meaning of the fair and equitable treatment is broad and in its application
relays on factual assessment and employment of standards of good-government conduct to
the case. The principle of fair and equitable treatment has been found to include principles
of legitimate expectations from the investor of stable business and legal environment by
the host state, transparency, good-faith, due process, proportionality and the prohibition on
arbitrariness.172
The principle has resulted in investors being awarded compensation for
non-transparency and excessive interference by governments in investments.173
ii. Protection and Security
Article 10 also provides that investment ―shall enjoy‖ constant protection and security The
standard includes state‘s duty to give police protection in case of attacks on the investment
and provide a safe environment for the investment to operate normally.174
In Electrabel the
tribunal was of the view that the standard requires due diligence from the state to prevent
physical harm to investors and their investment caused by a third-party within the state‘s
territory. And in another tribunal (Liman Caspian) the standard requires the obligation
from the state to protect investments against interference by use of force.175
171
ECT Article 10, second sentence 172
Hober 2007, p.329-330 173
Konoplyanik - Wälde 2006, p.538 174
Hober 2007, p.330 175
Investment Arbitration under the Energy Charter Treaty 2015, p.4
46
iii. Discrimination
The host is obligated not to take any discriminatory or unreasonable measures that impede
―management maintenance use enjoyment or disposal‘ of the investment 176
This
obligation overlaps with the principle of fair and equitable treatment. In Nykomb the
tribunal found Latvia in breach of obligation not to discriminate against foreign investment
by offering higher tariff to local energy companies only.177
iv. National and Most-Favoured Nation Treatment
Article 10(7) expresses the principle of national treatment and most-favoured nation
treatment and there application to investments and related activities, from the two
treatments the most favourable being applied. This means that a host state cannot favour a
national or foreign investor over investor from a CP state. Practices that can lead to
investor seeking support of the principles can be favourable tax treatment for local
entities,178
hindrances in the investor getting access oil and gas pipelines or electricity
transmission grid, problems in customs clearance.179
v. Principle of Pacta Sunt Servanda
The last sentence of Article 10(1) enshrines the principle of pact sun servanda as obligation
for the CP to observe its contractual obligations to the investor and or his investments and
also serves as an umbrella clause.180
It means that a claim can be brought against a CP for
failure to perform commercial contracts. In Al-Bahloul the tribunal found that Tajikistan
breached the umbrella clause by its failure to perform its contractual obligation to issue
licences for geological exploration.181
176
ECT Article 10, second part of third sentence 177
Hober 2007, p.330 178
ECT Article 21(Taxation) safeguards the host state‘s right to freely regulate its taxation measures and not
be obligated by the ECT provisions, with the exception of provisions on transit, national treatment and most-
favoured nation, and expropriation. 179
Konoplyanik - Wälde 2006, p.535 180
Hober 2007, p.330 181
Investment Arbitration under the Energy Charter Treaty 2015, p.4
47
4.4.2 Expropriation and Compensation
Investment protection regime under the ECT also provides for protection against
expropriation of investment and compensation for investment losses that are fundamental
to it. The principle of full compensation for expropriation is stated in Article 13 to the ECT
that is also found in majority of similar BITs.182
In present decade BITs signed by a number of SACs have led to disputes and the tribunals
finding the states in breach of expropriation and other standards of investment protection.
Bangladesh and Pakistan are two such states that the ICSID tribunals have held liable for
expropriation of investments in cases related to energy and natural resources sector. In
Tethyan Copper v. Pakistan the tribunal found the state in breach of fair and equitable
treatment standard, protection and security standard, impairing with enjoyment and
disposal of investment and expropriation. The claim arose out of decision by the state to
not issue a mining lease to the company for a copper-gold mine. The dispute was brought
on the basis of breach of Australia-Pakistan BIT (1998) before ICSID, and the tribunal in
2019 awarded damages to Tethyan Copper Company in the sum of 5.8 billion US dollars.
In another ICSID tribunal award (Karkey Karadeniz v. Pakistan) in 2017 the Pakistani
state was held liable for expropriation and hindering with the transfer of funds and was
ordered to pay approx. 800 million US dollars to the investor. The dispute had arisen when
a Turkish company‘s rental power contracts were terminated by the Supreme Court of
Pakistan, which was supplying electricity through power generation plants installed on
ships.183
And in Saipem v Bangladesh , a dispute that arose out of a construction contract
for gas pipeline, the ICSID tribunal in 2009 awarded against the state for expropriation
caused by the action of state‘s judicial system and ordered to pay the investor approx sum
of 6.2 million US dollar.184
The aforesaid tribunal awards are evidence of the effectiveness
of investment protection standards in protecting investment in South Asia and the adoption
of expropriation and compensation provision of the ECT into the MT would play a similar
and important role.
Expropriation is defined as nationalisation, expropriation or measures having equivalent
effect to the two aforesaid terms of investments.185
Elements for assessing expropriation
182
Hober 2007, p.332 183
The dispute based on the provisions of Pakistan-Turkey BIT (1995) 184
Claim brought forward based on the Italy-Bangladesh BIT (1990) 185
ECT Article 13(1)
48
are the degree of deprivation, permanence of conduct & irreversibility of its effect and
extent of economic loss of investor.186
It also includes a CP state expropriating assets of company in its area, in which an investor
has equity through shares.187
But it may in some cases considered expropriation where the
CP states action affects the use or economic value of an investment, without interfering
with ownership or assets of the company. 188
The protection provided under Article 13 applies whether the expropriation is lawful
(under conditions of Article 13) or unlawful and entitles the investor to ―prompt adequate
and effective compensation‖ 189
An expropriation by the CP state is lawful when it is made
for public interest purpose, is non-discriminatory, follows due process of law and is
accompanied by compensation.190
The compensation being valued before expropriation
took place and inclusive of interest. Besides the investor having recourse to arbitration
proceedings under Article 26 of the ECT against expropriation, they can also review the
exportation under the law of the CP state before a judicial or competent authority.
The Investors are to be provided with compensation for the loss of their investment, if it
caused due to ‗war or armed conflict state of national emergency civil disturbance or
similar event‘ and unnecessary requisition or destruction of the investment of CP state‘s
forces or authorities.191
4.4.4 Investment Dispute Settlement
Disputes related to energy investments can be brought under Article 26 by investors
against a CP state for breach of any of the obligations under the investment protection
regime (Part III of the ECT).192
186
Plama, para 19. 187
ECT Article 13(3) 188
Electrabel, para 6,62). 189
Hober 2007, p.333 190
ECT Article 13(1)(a)-(d). The conditions for lawful expropriation including principle of non-
discrimination and due process, overlapping with the standards and principles of investment protection stated
under Article 10 to the ECT. 191
ECT Article 12. No awards of ECT arbitral tribunals on subject matter of Article 12 till date. (31.05.2019)
192 Applicable law to arbitrations under ECT includes general international law, prominently customary
international law (e g law of treaties VC T law of state responsibility ‗Articles on Responsibility of States
for Internationally Wrongful Acts‘) General Principal of laws such as good faith may also be applicable to
ECT arbitration. (ECT Commentary p.167-168)
49
The Article 26 procedure provides that in case of a dispute arising between an investor and
a CP where the investment has been made, the parties can first try to solve the dispute
amicably within three months without referring it to dispute settlement mechanism. After
the aforesaid time period has passed parties have the option to resolve the dispute in the
courts/tribunals of the CP where the investment has been made or refer to a dispute
settlement body that has been previously agreed between the parties or to options provided
under the ECT. If the investor submitted dispute to national courts or previously agreed
dispute settlement mechanism, then arbitration proceedings cannot be brought under the
ECT.193
The dispute can be submitted to ICSID, arbitrator or tribunal setup under the Arbitration
Rules of UNCITRAL, or to Arbitration Institute of the Stockholm Chamber of Commerce.
The issues in the dispute would be resolved under the light of ECT provisions and relevant
international laws.194
Wälde being of the view that ECT and arbitration rules of ICSID and
UNCITRAL become fully applicable in, case of conflict, and have supremacy over
national law. 195
The award of the arbitration proceedings under Article 26 is final and binding on the
parties to the dispute. 196
But ECT does not provide for review of awards, but review is
possible if the arbitration method chosen (e.g. ICSID) allows it.197
Review may also be
possible by national courts called for enforcement of award if national law or international
obligations (e.g. New York Convention 1958) allow such a review. 198
Article 26 as dispute settlement provision can be wholly adopted into the MT with minor
amendments. SARCO can be added as an option for arbitration besides the above
mentioned arbitration avenues, as it would be an economical option and provide SARCO
with important place within the South Asian energy trade dispute settlement. And for the
dispute to settled amicably the parties can use the office of SAARC Secretary General,
who can play the role of a mediator before they refer the dispute to courts or arbitration.
193
ECT Article 26(3)(b)(i) 194
ECT Article 26(6) 195
Wälde-Thomas, Investment Arbitration under the Energy Charter Treaty, from dispute settlement to
treaty implementation. Arbitrartion Interntional Vol.12(4) 1996, p.438. 196
ECT Article 26(8) 197
Wälde p.458 198
Wälde p.458-9
50
4.5 Dispute Settlement between States on Treaty Interpretation
Article 27 to the ECT provides settlement of disputes between two CPs concerning the
interpretation and application of ECT provisions. ECT provides that if the dispute is not
settled between the parties in a ‗reasonable period‘ of time then the dispute should be
submitted to an ad hoc tribunal setup under Article 27 of the ECT.199
The ad hoc tribunal is
made up of three members, third member serving as the president of the tribunal. The
Permanent Court of Arbitration at Hague, which would serve as seat for tribunal as default
of decided otherwise. The UNICTRAL rules will be default rules in absence of previously
agreed arbitration rules. The dispute would be decided under the ECT and relevant
International law, the tribunal award/decision is final and binging on the parties. To date
these is no official record of dispute brought under Article 27 of the ECT.
For dispute arising around the MT, the SACs can incorporate from the Article 27 dispute
settlement provision. They can replace the choice of Permanent Court of Arbitration with
SARCO as a default avenue for arbitration or keep both the options with further having the
freedom choose besides the two. Or the MT can adopt a full-fledged dispute settlement
agreement template (titled ‗SAARC Inter-State Dispute Settlement Mechanism Template‘)
that was drafted for supplementing the dispute settlement provision found in the
Framework Agreement and annexed to the study (discussed in the section 4.3). The
adoption of the dispute settlement agreement template would provide with a more detailed
and effective dispute settlement provision.
The viability of the inter-state dispute settlement provision being able to resolve the
dispute between SACs concerning MT, can be gauged from looking at international
disputes resolved in past.200
Two recent inter-state disputes in that concerned natural
resources, the Indus Waters Kishenganga dispute (2013) between Pakistan and India, and
the Bay of Bengal maritime delimitation dispute (2014) between Bangladesh and India
were resolved through international arbitration before the Permanent Court of Arbitration
at The Hague. The arbitral awards were accepted by the states and complied with, this
despite being the disputes having a highly sensitive nature. The two disputes provide a
199
In ECT Article 27(2) ‗reasonable period of time‘ not defined But can be assumed to be as in other
International Investment Agreements of not exceeding usually six months.
200 Lee 2017, p.117
51
good evidence of inter-state dispute settlement being effective even when the states are
hostile to each other and bodes well for any inter-state disputes arising around the MT.
4.6 State-owned Enterprises’ Obligation
State-owned and privileged enterprises (SOE) and their obligation to follow the ECT
provisions are dealt within Article 22 to the ECT.201
The provision‘s role is to ensure
impact and influence of SOEs is no greater than private enterprises, and the state does not
use the SOE to dominate or monopolise the energy market.202
Thus the provision implies
that SOEs violation of ECT can be attributed directly to the state. In the Nykomb case, the
tribunal agreed to the claim that Latvenergo (a Latvian SEO) activities were attributable to
the state.203
In Salini v Morocco the tribunal stated that a state‘s control and participation
through the SOE can be gauged by identifying the company‘s structure (shareholders) and
function (objectives of company).204
Further the Article 22 of the ECT also reiterates the
customary international law of state responsibility, which has been codified by
International aw Commissions‘ in articles on ‗Responsibility of States for Internationally
Wrongful Acts‘ in 2001 205
This provision is also important in context of South Asia as SOE‘s dominate the energy
sector in the region.206
All the eight countries have different level of energy market
structure, from vertically integrated to totally unbundled SOEs present in the electricity
sector, and mainly vertically integrated SOEs present in the natural gas sector. The SEOs
are also involved at present in electricity trade between India and its neighbours. And the
201
No definition of SOE provided in the ECT or an agreed international definition of SOE present. 202
Leal-Arcas 2018, p.312 203
Ibid. p.313 204
Ibid. p.302 205
Ibid. p.306 206
Afghanistan : Afghanistan Electricity Company,
Bangladesh: Bangladesh Power Development Board, Petrobangla, Bangladesh Petroleum Corporation
Bhutan: Bhutan Power Corporation, Druk Green Power Company
India: GAIL, India Oil Cooperation, ONGC, NTPC, Bharat Petroleum
Maldives: State Electric Company Limited, Maldives National Oil Company
Nepal: Nepal Electricity Authority, Nepal Oil Corporation
Pakistan : Pakistan State Oil, Sui Gas Companies, Water and Power Development Authority
Sri Lanka :Ceylon Electricity Board, Lanka Electricity Company, Ceylon Petroleum Corporation
52
under development regional energy projects of CASA-1000, TAPI and IP gas are also
being handled by SEOs of the respective countries.207
Half of the SACs namely Afghanistan, Maldives, Nepal and Sri Lanka have vertically
integrated SEOs in the electricity market meaning generation, transmission and distribution
of electricity is managed by one major SEO in each of the respective states.208
In
Bangladesh and Bhutan the SEOs are partially unbundled, meaning one of the operations is
divided between the different SEOs or other relevant private entities. In Bangladesh one
SEO (Bangladesh Power Development Board) is responsible for both generation and
distribution of electricity and a separate SEO (Power Grid Company of Bangladesh) is
solely for transmission. On the contrary in Bhutan one SEO (Bhutan Power Cooperation) is
responsible for both transmission and distribution and another SEO (Druk Green Power
Company) only for generation. Finally, India and Pakistan are the only two SACs where
electricity sector operations are unbundled but still the separate segments are dominated by
SEOs, especially in transmission.
In the natural gas sphere Bhutan, Maldives, Nepal and Sri Lanka have no local reserves of
natural gas, and import LPG for domestic use through SEOs. Bangladesh, India and
Pakistan having local gas reserves explore gas through their SEOs and the transmission
and distribution is also handled by SEOs. Afghanistan having proven reserves of natural
gas but having done no substantial exploitation has also two SEOs responsible for natural
gas importation, exploration and distribution.
As identified in the above paragraphs, South Asia energy markets are dominated by SEOs,
so to attract investment and giving level playing field to new entrants the inclusion of the
Article 22 provision would ensure that a SAC would not abuse its position in energy
market through its SEOs and if it does it would be held liable for its conduct.
207
SEOs in CASA-1000: Afghanistan DABS , Pakistan: National Transmission Dispatch Company.
TAPI and IP: Afghanistan Gas Enterprise, Pakistan: Inter State Gas. 208
Electricity SEOs in Afghanistan: Afghanistan Electricity Company, Maldives: State Electric Company
Limited and FENAKA , Nepal: Nepal Electricity Authority, and Sri Lanka :Ceylon Electricity Board.
53
4.7 Other Relevant Provisions
4.7.1 Application of WTO Rules
The ECT like the SAFTA Agreement also incorporates WTO rules by reference.209
Article
4 to the ECT provides that the states would not derogate from provisions of WTO in
fulfilling their obligation under the ECT. It further provides that ECT CPs, who are not
WTO members will have to abide by Annex W to the ECT that functions as an ad hoc
trade regime and contains provisions from the WTO Agreement.210
Among the eight
SAARC member states, Bhutan is the only country that is not a member of the WTO and
to date has accession negotiations going on.211
Thus in the case of adoption of Article 4 of
the ECT provision into the MT, would mandate Bhutan to be partially bound by the WTO
provisions by reference. This would provide a foundation for Bhutan to be familiar to
WTO provisions and in specific their working in international energy trade. The indirect
incorporation of WTO law would also incorporate the ‗fundamental principles of
international trade law‘212
.
ECT besides obligating states not to derogate from the WTO provisions also obligates
them to not apply trade related investment measures213
that are inconsistent with the
provisions of Article III (national treatment on internal taxation and regulation) or XI
(general elimination of quantitative restrictions) of the GATT.214
The aforesaid obligation
is a partial adoption of WTO‘s ‗Agreement on Trade-Related Investment Measures‘ The
provision related to trade related investment measures would also be an important addition
to the MT, and measures taken in hindering regional energy trade contravening the
important international trade law principle of national treatment and quantitative
restrictions in the form measures like quotas and licences would be prohibited. As
evidenced in the ‗India Solar Cells’ 215
dispute before the WTO having this provision
209
The WTO rules (GATT and GATS) apply to tradable energy goods such as extracted oil, coal and
natural gas.
210 ECT Article 29(2)(a)
211 World Trade Organisation, Bhutan.
212 MFN, NT and elimination of quantitative restrictions
213 A trade related investment measure is not defined in the TRIM Agreement, but a methodology to establish
a measure as a trade related investment measure is given in the Indonesia-Autos (WTO Panel Report:
Indonesia — Certain Measures Affecting the Automobile Industry, WT/DS54/R , WT/DS55/R , WT/DS59/R
, WT/DS64/R, 2 July 1999)
214 ECT Article 5
215 In ‗Case DS456 India Solar cells’ the WTO Panel Report found that domestic content requirement in
production of solar cells and modules and sale to government agencies was inconsistent with national
54
would provide investor with further protection and fair treatment when investing in the
energy sector. Thus larger South Asian economies like India or Pakistan would not be able
to put measures in place that would disadvantage investors from smaller SACs.
4.7.2 Exceptions to Application of Treaty Provisions
CPs to the ECT are allowed to adopt or enforce a number of measures that might hinder
with energy trade and investment, but are exempted from provisions of the ECT with the
exception of compensation and expropriation of investments provisions.216
The measures
exempted from ECT provisions application are of measure necessary to protect human,
animal or plat life or health;217
to acquire energy resources in case of shortage, but not
discriminate in divisions of the resources (between other CPs and discontinue the policy as
soon as the shortage is gone); and of protecting essential security interests, implementing
national policies related to non-proliferation of nuclear weapons, and maintenance of law
and order. But the states are not allowed to take measures that are disguised or hidden
restrictions on energy transit under the guise of protection of security interests and
maintenance of law and order.218
This provision providing exemption from application of ECT in case of protection of
human, animal or plant life or health is also present in Article 14 to the SAFTA
Agreement. The addition of exemption of measures under Article 24(3) would also provide
states with keeping national security at the forefront without being concerned about ECT
or the MT application. In South Asia, where countries are still in conflict or recovered
from it recently this provision provides them to pursue energy investment and trade
friendly policy, while also keeping national security and public order in check.
treatment obligation under Article III of GATT and therefore also with Article 2(1) of Agreement on Trade-
Related Investment Measures‘
216 ECT Article 24. The provision found inspiration from GATT.
217 ECT Article 24(2 (i). This provision being similar in nature to GATT Article XX
218 ECT Article 24(2)(ii) and Article 24(3)
55
4.8 Summary and Adoption of the ECT provisions in to the Model Treaty
The relevant provisions of the ECT were discussed with comparison to SAARC laws and
other relevant international law provisions in the context of energy trade in South Asian
region. In this section the elements necessary for the MT are summarised and its
implementation discussed.
The objectives and principles of ECT highlighted in section 4.1 would serve as a firm
foundation for the formulation of the MT‘s ambit and reach and result in the achieving
closer working of the SACs in the energy sector. The ‗energy material and products‘ and
‗energy related equipment‘ definitions in the ECT provide comprehensive list of aforesaid,
and the inclusion of these definitions in the MT would be integral to the understanding of
the energy commodities and infrastructure used to trade them. Further the definitions for
economic activity, and investments and related terms also require inclusion in the MT, as
the MT would also be focusing on energy investments.
Transit provision‘s inclusion along with draft Transit Protocol in the MT would be an
integral and the most important part of the MT and provide the SACs with standard transit
rules for present and future regional energy trade. The investment protection provisions
inclusion in the MT would provide the investors from the region incentive to invest
knowing that their investments would be treated fairly and on equal terms, and
compensated in case losses or expropriation, similar provisions in other BITs (see section
4.4.2) have shown the effectiveness of the investment protection regime.
The inclusion of dispute settlement provisions in the MT can have a similar or different
approach from the ECT. In transit disputes the conciliation procedure could be replaced by
a different dispute resolution mechanism procedure stated in section 4.3.3. The dispute
settlement between investor and states could include the Article 26 of the ECT with the
addition of SARCO as one of the options for arbitration provision. Lastly the dispute
settlement between states on the interpretation of the MT could be resolved through the
procedure provided in Article 27 ECT or adoption of dispute settlement procedure template
drafted for the Framework Agreement.
The Model Treaty can be implemented by the SACs under the auspices of SAARC or as a
stand-alone treaty. Bringing the MT under the umbrella of SAARC would supplement the
SAFTA Agreement and also the SAARC Framework Agreement.
56
5 CONCLUSIONS
The previous chapters went over the energy situation and energy market structure of each
SAC, the present and forthcoming intra-regional and inter-regional energy trade dealings
and projects in South Asia, laws relevant to energy trade in the region, analysis of the ECT
keeping in context the aforesaid issues, and providing analysis on how the ECT and other
relevant law provisions can be adopted into MT.
South Asia having had average annual GDP growth rate of 6 percent (from 2000-2017) and
holding within it 22 percent of the world‘s total population requires great amounts of
energy, stable supply and diversification of energy resources to maintain its growth rate
and bring economic prosperity across the region. As stated in Chapter 2 the region is rich
in natural resources and it borders energy rich Central Asian states and Iran. Bhutan and
Nepal have large hydropower generation potential that has yet not been utilised to its full
potential. Afghanistan although being rich in natural resources to date has not been able to
develop its energy exploration and exploitation infrastructure mainly due to poor law and
order situation and resultant negligible foreign investment in the country. India,
Bangladesh and Pakistan have sizeable domestic energy resources but they are not
sufficient to meet the total energy demand of the huge population and growing economy.
Sri Lanka has local hydropower generation and the rest demand is met by energy imports
and Maldives being totally reliant on energy imports as it has no domestic energy
resources.
Besides the deficiency in energy sector identified in the region, there are examples of
successful electricity trade between India with Bhutan and Nepal, which is further to
increase under bilateral agreements between the countries. And the construction projects to
supply electricity and gas from Central Asian states transiting through Afghanistan to the
east. These isolated trade projects could lay down the foundation for interconnecting the
electricity and gas transmissions system of the SACs in future that would allow to access
energy from different corners of the region.
The study of the energy situation in the region and the fact that energy trade within the
region makes up less than 5 percent of the total trade within the region,219
leads one to look
219
ADB Energy Trade in South Asia 2012, p.37
57
at regional laws that regulate trade on a regional level and how they affect trade in energy
resources. The SAFTA Agreement analysed (under section 3.5.1) above provides trading
regime for the region complaint with the WTO rules, to trade goods at lower tariffs among
themselves. The trade liberalisation under the SAFTA has not filtered down to trade in
energy resources, and also trade in other goods have been hindered by the provision that
provides exception to trade liberalisation provided for in the SAFTA Agreement. Besides
that failure of regional laws another issue is of domestic energy sector legal and regulatory
frameworks in place that vary in nature across the region and are impediment to energy
trade and investment.
The above paragraphs cleared the picture of energy trade situation within the region and
answering the first two research questions for this thesis. Thus this would require
alleviating the energy trade situation from its present state and as the ADB Study
recommended one of the option was to put in action a regional cooperation in energy trade,
and one way of enhancing the cooperation could be achieved via the development of a
‗SAARC regional energy trade and cooperation agreement‘ that could be modelled on the
ECT.220
The thesis also found that the ECT is a suitable instrument for a modelling an
agreement for energy trade in South Asia after analysing its provisions in the regional
context.
The third and fourth research questions being of intertwined nature were answered under
Chapter 4 that required analysing the ECT and how the ECT‘s provisions adoption into
MT would affect energy trade in the region. The ECT was chosen for adoption as it is the
sole international treaty specific to energy trade, transit and investment and has been in
force for about 20 years with sizeable number of signatories, and has been tested in field
which could be evidenced by the workings of the Energy Charter Conference and
arbitrations awards made under the ECT.
The ECT like the SAFTA Agreement abides by WTO rules by making reference to them,
and hence the MT could concurrently run with the SAFTA Agreement, but with the need
to amend it to apply full trade liberalisation to trade in energy goods. The transit provision
being the most important element of the ECT and its adoption is necessary for success of
regional energy trade. Adopting the transit provision would highly beneficial as it would
provide for a stable and common transit regime that protects transit infrastructure and
220
Ibid. p.93-34
58
treats all investor be they domestic or international equally. The transit regime would
provide a platform that would allow electricity to flow from Bhutan and Nepal to transit
from India to its western and eastern neighbours, and natural gas and electricity from
Central Asia to transit from Afghanistan to its eastern SACs. Further the transit provision
would provide the impetus for the energy systems of SACs to be interconnected and results
in the SACS having a better security of supply situation than before.
The investment protection regime under the ECT is another important element as it
obligates the host state to treat foreign investments in a non-discriminatory manner and
abide by a number standards and principles, and provides protection against expropriation
and recourse to neutral dispute settlement options. The investment protection regimes
presence would be attractive element of the MT in occasions where the local governance
and judicial systems tend to be unreliable or corrupt in some cases and in some parts of the
region there can be sudden political or social instability that could result in damage and
loss of an investment. The study of awards under BITs (in section 4.4.2) that compensated
investors for their losses is a good example of the investment protection regime of similar
to the MT being effective when enforced in South Asia. The investors have recourse to
international arbitration under ICSID, UNCITRAL, Stockholm Chamber of Commerce and
regionally designed and based SARCO, and the parties can make reference to and rely on a
number of arbitral awards that are already been awarded under the ECT for guidance.
The MT adoption would result in having uniform laws for energy trade projects and related
services all over the region resulting in lower cost of doing business than before. Further
the MT would require to be backed up by an appropriate domestic policy and law for its
effective enforcement domestically and harmonisation of technical aspects related to
energy trade.
The adoption of the MT would serve the important purpose of providing a new framework
that would encourage and lead to growth in energy trade and being a future linchpin in the
South Asian energy trade governance structure.